What is the Responsibility Center?
Responsibility Center refers to a particular segment or unit of an organization for which the particular manager or employee or department is held responsible and accountable for its business goals and objectives. It refers to the part of the company where a manager has some sort of authority and responsibility. A responsibility center is a functional entity within a business that would tend to have its own goals and objectives, policies, and procedures thereby giving managers specific responsibility for revenues that they generate, expenses incurred, funds invested, etc.
Types of Responsibility Center
There are usually 4 types of responsibility center which are identified as under.
- Cost Center – Under the cost centerCost CenterCost center refers to the company's departments that don't contribute directly to the corporate revenue; however, the firm has to incur expenses for keeping such units operative. It comprises research and development, accounting and human resource departments., the manager is held responsible only for the costs which generally include a production department, maintenance department, human resource department, etc.
- Profit Centers – Under the profit center the manager is responsible for all of the costs and the revenues. Here the manager would have all of the responsibility to make decisions that would affect both the cost as well as the revenue.
- Revenue Center – This segment is primarily responsible for attaining sales revenue. The performance would be evaluated by comparing the actual revenue attained with that of the budgeted revenue
- Investment Center – This center apart from having to look into the profits looks into returns on the funds invested in the group’s operations during its time.
Examples of Responsibility Center
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
- Investment Center: Example would be that of a subsidiary entity for which the subsidiary’s president is held responsible.
Advantages of Responsibility Center
Given below is how the responsibility center helps an organization.
- Assignment of Role and Responsibility: When there is a responsibility attached to each segment, each and every individual is aligned and directed towards a purpose with the responsibility that is in line with their roles. The person or department will be tracked and nobody can shift the responsibility to anybody else suppose anything goes wrong
- Improves Performance: The idea of having to assign tasks and responsibilities to a particular person would stand to act as a motivational factor. Knowing that their performance will be tracked and reported to the top management, the departments and persons involved will try their best to give in their best performance
- Delegation and Control: The assignment of responsibility center with roles being assigned to various segments helps the organization to bring about and achieve the purpose of delegation. Responsibility of various persons to is fixed which will help the management in controlling their work. Thus it now helps the management achieve the desired dual objective of having delegation plus control over the tasks
- Helps in Decision Making: Responsibility centers help the management in decision making as the information disseminated and collected from various centers helps them in planning all of its future actions. It helps them understand the segment-wise breakups of revenues, costs, issues, future plans of action, etc.
- Helps in Cost Control: By having a segment-wise breakup responsibility centers help the top management in having to assign different budgets for the various centers thereby achieving cost controlCost ControlCost control is a tool used by an organization in regulating and controlling the functioning of a manufacturing concern by limiting the costs within a planned level. It begins with preparing a budget, evaluating the actual performance, and implementing the necessary actions required to rectify any discrepancies. as per the requirements.
Disadvantages of Responsibility Center
There are certain disadvantages along the way that may crop up and impair the system of responsibility centers
- Presence of Conflict of Interest: There may be a possibility that a conflict of interest may arise between the individual and that of the organization. A sales individual may try forceful selling in certain restricted areas to increase his commissions identified under his/her responsibility center whereas the management may have its policy prohibit the same
- The requirement of Time and Effort: This system involves a lot of time and effort on the part of the management to thoroughly plan and chalk out the required course of action. Should something go wrong in the planning process the entire process is doomed to fail and would be nothing but a recipe for disaster
- Ignores Personal Reaction and Feedback: There may be at times resistance and reluctance on the part of the employee or manager for whom a certain department/segment/role is assigned. The method seems to neglect such feedback on part of the top management and may seek to focus only on the bottom lineBottom LineThe bottom line refers to the net earnings or profit a company generates from its business operations in a particular accounting period that appears at the end of the income statement. A company adopts strategies to reduce costs or raise income to improve its bottom line. achieved through segregation of such centers
- Too much Process-Oriented: A lag in such a system is that it may too much of a process-oriented wherein the focus is on segregation and assignment of responsibility into various segments. Thus too much time, effort and focus is being given to such actions
Limitations of Responsibility Center
- A major limitation of such a system is attributed to too much focus given on process-oriented methods, which tends to consume too much time and effort and effort on part of the management in having to assign certain responsibilities
The method of assigning responsibility center within an organization to help achieve the organizational goals through segregation and tagging to each manager no doubt helps in achieving delegation and control apart from tracking the performance that tends to act as a motivational booster. However, it becomes important for management to realize that one should not be too focused or be process-oriented that would cripple out the initial objects set. By doing so a company is most likely to sabotage itself when it focuses on the hierarchical scheme of things. Results may not be achieved and targets may just become numbers to frown upon.
Hence to solve such problems it becomes imperative that the responsibility centers is not process-oriented that they tend to miss out on the initial objectives set forth. When done efficiently it helps in tracking and measuring the performance of each of the segments as listed out.
This has been a guide to What is Responsibility Center and its Definition. Here we discuss the responsibility center types along with examples, advantages, and disadvantages. You can learn more about accounting from the following articles –