A responsibility center is an organizational unit headed by a
manager
Management (or managing) is the administration of an organization, whether it is a business, a nonprofit organization, or a government body. It is the art and science of managing resources of the business.
Management includes the activities ...
, who is responsible for its activities and results. In
responsibility accounting, revenues and cost information are collected and reported on by responsibility centers.
Typical examples of responsibility centers are the
profit center
A profit center is a part of a business which is expected to make an identifiable contribution to the organization's profits.
Overview
A profit center is a section of a company treated as a separate business. Thus profits or losses for a prof ...
,
[Melumad, Nahum, Dilip Mookherjee, and Stefan Reichelstein.]
A theory of responsibility centers
" ''Journal of Accounting and Economics'' 15.4 (1992): 445-484. cost center and the investment center.
Profit center
A profit center is characterized by the responsibility to choose inputs and outputs with a fixed level of investment.
Performance evaluation
A typical measurement for profit center management is the ability to maximize profits as they are responsible for both costs and revenues.
Cost center
A cost center is characterized by the lowest level of responsibility compared to the other two centers. Cost center managers are expected to produce as much output with a fixed amount of resources/input and to reduce costs.
Performance evaluation
Managers are generally evaluated based on cost control and reduction as they have no delegation to increase sales generation.
Investment center
An investment center has the highest level of delegated autonomy. Investment center's have the highest level of autonomy as they can determine the level of inputs, outputs and additional investments.
Performance evaluation
The most common metric for evaluating management performance is the
return on investment
Return on investment (ROI) or return on costs (ROC) is a ratio between net income (over a period) and investment (costs resulting from an investment of some resources at a point in time). A high ROI means the investment's gains compare favourably ...
(ROI). The unit can be held responsible for generating an adequate ROI as the business unit has the autonomy to determine the key influencing variables.
References
Management accounting
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