A segment is a fairly autonomous unit or division of a company defined according to function or product line. Traditionally, owners have organized their companies along functional lines. The segments or departments organized along functional lines perform a specified function such as marketing, finance, purchasing, production, or shipping. Recently, large companies have tended to organize segments according to product lines such as an electrical products division, shoe department, or food division. Show
A responsibility center is a segment of an organization for which a particular executive is responsible. There are three types of responsibility centers—expense (or cost) centers, profit centers, and investment centers. In designing a responsibility accounting system, management must examine the characteristics of each segment and the extent of the responsible manager’s authority. Care must be taken to ensure that the basis for evaluating the performance of an expense center, profit center, or investment center matches the characteristics of the segment and the authority of the segment’s manager. The following sections of the chapter discuss the characteristics of each of these centers and the appropriate bases for evaluating the performance of each type. An expense centeris a responsibility center incurring only expense items and producing no direct revenue from the sale of goods or services. Examples of expense centers are service centers (e.g. the maintenance department or accounting department) or intermediate production facilities that produce parts for assembly into a finished product. Managers of expense centers are held responsible only for specified expense items. The appropriate goal of an expense center is the long-run minimization of expenses. Short-run minimization of expenses may not be appropriate. For example, a production supervisor could eliminate maintenance costs for a short time, but in the long run, total costs might be higher due to more frequent machine breakdowns. A profit center is a responsibility center having both revenues and expenses. Because segmental earnings equal segmental revenues minus related expenses, the manager must be able to control both of these categories. The manager must have the authority to control selling price, sales volume, and all reported expense items. To properly evaluate performance, the manager must have authority over all of these measured items. Controllable profits of a segmentresult from deducting the expenses under a manager’s control from revenues under that manager’s control. Closely related to the profit center concept is an investment center. An investment center is a responsibility center having revenues, expenses, and an appropriate investment base. When a firm evaluates an investment center, it looks at the rate of return it can earn on its investment base. Typical investment centers are large, autonomous segments of large companies. The centers are often separated from one another by location, types of products, functions, and/or necessary management skills. Segments such as these often seem to be separate companies to an outside observer. But the investment center concept can be applied even in relatively small companies in which the segment managers have control over the revenues, expenses, and assets of their segments. What are Responsibility Centers?Responsibility centers are categorized depending on the level of control over revenues, costs, or investments. Responsibility centers can be based on such attributes as sales regions, product lines, or services offered. The purpose of establishing responsibility centers within organizations is to hold managers responsible for only the assets, revenues, and costs they can control. The level of control a manager has over a segment’s assets, revenues, and costs will help determine the type of responsibility center used for each manager. What is a Cost Center?A cost center is an organizational segment that is responsible for costs, but not revenue or investments in assets. Service departments, such as accounting, marketing, computer support, and human resources, are cost centers. Managers of these departments are evaluated based on providing a certain level of services for the company at a reasonable cost. Production departments within a manufacturing firm are also treated as cost centers. Production managers are evaluated based on meeting cost budgets for producing a certain level of goods. What is a Profit Center?A profit center is an organizational segment that is responsible for costs and revenues (and therefore, profit), but not investments in assets. Managers of profit centers are responsible for revenues, costs, and resulting profits. Profit center determination must be made on a case-by-case basis, and it depends on the level of responsibility assigned to the store manager. Methods of performance evaluation for profit centers vary. Some organizations compare actual profit to budgeted profit. Others compare one profit center to another. Also, some organizations use segmented income statement ratios, such as gross margin or operating profit, to compare current profit center performance to prior periods and to other profit centers. What is an Investment Center?An investment center is an organizational segment that is responsible for costs, revenues, and investments in assets. Investment center managers have control over asset investment decisions. In many cases, investment centers are treated as stand-alone businesses. Several measures can be used to evaluate the performance of investment center managers, including segmented net income, ROI, RI, and economic value added (EVA). Related Topics
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Which responsibility Centre is responsible for revenue expenses and capital investment decisions?Profit center managers are responsible for revenues and expenses generated as well as incurred by their organizational subunit. Investment center managers are profit as well as the capital investments required to generate the profit.
Which responsibility center is responsible for revenue expenses?A profit center is responsible for both revenues and expenses, which result in profits and losses. A typical profit center is a product line, for which a product manager is responsible.
What are the 4 types of responsibility centers?Given below are the examples of the responsibility center. Revenue Center: A good example would be the sales department or the salesperson. Cost: A good example, in this case, would be the janitor department. Profit Center: This would be a product line for which the product manager will be responsible.
What are profit centers responsible for?A profit center is a branch or division of a company that directly adds or is expected to add to the entire organization's bottom line. It is treated as a separate, standalone business, responsible for generating its revenues and earnings.
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Which responsibility center is responsible for revenue expenses and capital investment decision?
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