Definition: Responsibility Centre refers to an operating segment within the firm, lead by the manager who is accountable for its activities, performance and results, in terms of expenditure, profit, and return on investment.
A responsibility centre has its own goal and objectives, plans and strategies, policies and procedures. Further, it has a dedicated team or staff who works for the achievement of its goals and performance targets.
As the firm grows and expands, its size, functions, activities and overall structure also change and so, for better management and control over the organization, it is split into various centres and the management assigns the responsibility to the supervisor or manager These centres are termed as responsibility centres.
Types of Responsibility Centre
- Cost Centre: The smallest segment of an organization for which a specific accumulation of cost is attempted, is called cost centre. It is that unit of the firm into which the entire factory is divided appropriately. It can be a department or a team, which represent one job, activity, process or machine, whose costs are allocated equitably and practically to cost unit, for the purpose of costing.
The performance of the cost centre can be measured against set standards and budgets. Cost centres are created after determining a rational basis, for tracing and attributing the cost of production and a person is authorized to control the centre and is accountable for its performance and cost charged to the centre.
- Profit Centre: A type of responsibility centre, which is held accountable for all the production-related activities and the sale of products, and provision of services. Meaning that the managers of the profit centres are not only responsible for the incurrence of expenditure, but also for the generation of revenue. Hence, both inputs and outputs are measured, so as to identify the firm’s profitability.
The profit centres aim at adopting new ways and implementing such strategies which help in earning more profits on a product, service or activity. Strategic business units are one of the examples of profit centres.
- Revenue Centre: Revenue Centre is a uniquely identifiable subunit of the organization which is held accountable for generating revenue for the organization from selling products and rendering services. The efficiency of the revenue centre is evaluated on the basis of its ability to generate sales and not on the costs incurred. The manager of the revenue centre is held responsible for achieving sales targets.
A company’s sales department is an example of a revenue centre, which is responsible for attaining the sales targets.
- Investment Centre: Responsibility Centres which are not just accountable for the profitability of the unit but are authorized to take important decisions concerning the capital investments, such as company’s credit policy, monetary policy, inventory policy, etc.
The head of the investment centre is held accountable for making decisions regarding investment in the production, advertising and assets. Return on Investment acts as the basis for measuring the performance of the investment centres.
One can gauge the performance of the responsibility centre against a pre-defined standard. Thereafter, the actual results are compared with the standard ones and are evaluated against the objectives of the firm.