Responsibility Center

Updated on March 21, 2024

What is the Responsibility Center?

Responsibility Center refers to a particular segment or unit of an organization for which a particular manager, 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 authority and responsibility. A responsibility center is a functional entity within a business that tends to have its own goals and objectives, policies, and procedures, thereby giving managers specific responsibility for revenues, expenses incurred, funds invested, etc.

Key Takeaways

  1. A company’s responsibility center is a functional unit that typically has its aims, policies, and practices.
  2. There are four general responsibility centers in any organization, such as cost center, investment center, revenue center, and profit center. 
  3. Responsibility centers result in better performance, task delegation, increased accountability, and improved cost control over various business departments.
  4. Such centers pose problems such as abundant process orientation and micro-managing, conflict of interest within centers, extra effort, time restrictions, etc.

Types of Responsibility Center

There are usually 4 types of responsibility center which are identified as under.

  1. 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.read more, the manager is held responsible only for the costs, including a production department, maintenance department, human resource department, etc.
  2. Profit Centers –  Under the profit center the manager is responsible for all costs and revenues. Here the manager would have all of the responsibility to make decisions that would affect both the price and the revenue.
  3. Revenue Center – This segment is primarily responsible for attaining sales revenue. The performance would be evaluated by comparing the actual revenue attained with the budgeted revenue.
  4. Investment Center – Apart from looking into the profits, this center looks into returns on the funds invested in the group’s operations during its time.
Responsibility Center

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Examples of Responsibility Center

Given below are the examples of the responsibility center.

  1. Revenue Center: A good example would be the sales department or the salesperson.
  2. Cost: A good example, in this case, would be the janitor department.
  3. Profit Center: This would be a product line for which the product manager will be responsible.
  4. 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 individual is aligned and directed towards a purpose with the responsibility 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 assigning 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 to give their best performance.
  • Delegation and Control: The assignment of responsibility center with roles assigned to various segments helps the organization bring about and achieve the purpose of delegation. The responsibility of multiple persons is fixed, which will help the management control their work. Thus, it now helps the management achieve the desired dual objective of delegating and controlling 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 plan their future actions. It helps them understand the segment-wise breakups of revenues, costs, issues, plans of action, etc.
  • Helps in Cost Control: Having 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.read more as per the requirements.

Disadvantages of Responsibility Center

Certain disadvantages 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 their responsibility center, whereas the management may prohibit the same.
  • The requirement of Time and Effort: This system involves a lot of time and effort on 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: At times, there may be 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 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. read more 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 on process-oriented methods, which tends to consume too much time and effort and effort on the part of the management in having to assign certain responsibilities.

Conclusion

The method of assigning responsibility centers within an organization to help achieve the organizational goals through segregation and tagging to each manager undoubtedly helps achieve 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 process-oriented, which would cripple the initial objects set. A company is most likely to sabotage itself by doing so when it focuses on the hierarchical scheme of things. As a result, outcomes 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 are not process-oriented and 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.

Frequently Asked Questions (FAQs)

Why do businesses create responsibility centers?

To keep managers accountable for only the resources, income, and expenses they can influence, corporations have established responsibility centers. For instance, a factory manager normally has little control over sales, only the production expenses.

How do you spot a company’s responsibility center?

The company’s elaborate organizational chart is an obvious place to start when looking for responsibility centers. The several departments that make up a firm are the most typical responsibility centers.

What function does the manager in a responsibility center perform?

A responsibility center’s manager is in charge of overseeing the operations of the organizational division. The outcomes of specific financial and non-financial performance benchmarks are also their responsibility.

This has been a guide to the responsibility center and its definition. Here we discuss the responsibility center types and examples, advantages, and disadvantages. You can learn more about accounting from the following articles –

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