Organisations and management accounting
Organisations and management accounting

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Organisations and management accounting

5.3 Responsibility centres

Decentralisation results in the creation of separate responsibility centres – aspects/areas of the organisation’s operations for which a particular manager is responsible. The main types of responsibility centre in common use are as follows.

Cost centre. The manager is assumed to be able to influence significantly the level of cost incurred and will be judged according to how well costs are controlled. There may or may not be revenues associated with the particular aspect of operations concerned, but if there are, the manager is assumed to have no control over these. Managers of cost centres will need regular information to be provided by the accounting system, concerning how individual cost items compare with budget – that is, budget variance and, of course, budgetary planning information, for example, cost targets to be achieved.

Revenue centre. The manager is assumed to be able to influence significantly the level of revenue earned and will be judged on the basis of this. Revenue centres are principally intended to be applied to sales operations, where the manager’s responsibilities relate to the generation of income, whether or not there are attributable costs. Managers will need information concerning targets for individual revenue generating units (e.g., products), and also regular feedback information on actual versus budgeted revenues.

Profit centre. The manager is assumed to be able to influence significantly both costs and revenues and is judged on the basis of the level of profit generated by the particular aspect of operations concerned. The term profit centre is usually limited to the situation where the manager does not have responsibility for the level of investment in the centre (this decision being made by more senior management). Managers need information concerning both revenues and costs, for example, which products/services are profitable.

Investment centre. This is a type of profit centre, but one for which the manager also has significant influence over investment decisions. In such cases, it would be expected that, in addition to the normal profit centre measures (e.g., Return on Sales), profit would be related to the capital invested (e.g., Return on Investment). Managers need the same information as for profit centres and in addition, detailed appraisals of potential investments and control information concerning the level of investment (e.g., working capital levels, namely, inventory, receivables and payables) at any particular point in time.

Activity 4

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