Download Responsibility center can be defined as an organization unit held

Responsibility center can be defined as an organization unit held accountable for certain activity
or function to achieve its objective under the supervision of manager. It should be in alignment
with the overall growth of firm along with compliance to other responsibility center operations.
We can take the example of Sun Shine Orange Grove. It has different grading units which can be
treated as responsibility centers. Cluster of grading units can again be an example of larger
responsibility center. Sorting units in different building blocks of hospital can together be
defined as sorting responsibility center. The overall sorting responsibility center of firm can
collaborate with other grading responsibility center to form the grading unit of hospital which is
again a responsibility center in itself. The grading unit along with other operational division of
Sun Shine Orange Grove organization can make the whole company as one responsibility center.
We can consider three responsibility centers in healthcare organization to explain it better:

Revenue Centers

Cost Centers

Profit Centers

Investment Centers
Revenue Centers
This is type of responsibility center whose manager has no control over the manufacturing price
of items or the amount of investment in the center but they are in charge of revenue control.
They are generally small responsibility unit in the organization. The sales unit of SSOG is an
example of revenue center whose prime responsibility is to evaluate the sales, cost of goods sold
and gross margin which depends on the unit of sale in comparison to production unit of pulp-free
and high pulp orange juices.
Center
Actual (2005)
Budget
Variance
Revenue
$5,050,000
$5,220,000
- $170,000
In revenue center, sales are factor for checking performance of the unit. Since Revenue center is
showing variance of -$170,000 which is negative in comparison to expected budget of 2005.
Hence, it is not performing according to the expectation of estimated budget.
Cost Centers
This is kind of responsibility center whose manager control costs but they have no authority over
the investment or revenues. They have expense budget for controlling the cost of the center.
Manufacturing unit can be classified as cost center in Sun Shine Orange Grove organization.
There are two types of cost involved in cost center – Engineered and Discretionary. Engineer
costs include labor charge, material consumption, electricity bill etc. Manager has the
responsibility of quality check for supplies also. There is no straight relationship between cost
and expenses in discretionary cost. Machines used for diagnosis is an example of discretionary
cost.
Center
Cost
Actual (2005)
$325,000
Budget
$313,000
Variance
-$12,000
Price variance is assessed in cost center for checking the performance of the unit. Price variance
is calculated by subtracting actual expenses from the budgeted amount. Since it is showing
negative value of $12000, its performance is not according to the expectation of estimated
budget. It is crossing the limit of budget.
Profit Centers
This is kind of responsibility center whose managers control both the revenues and costs of the
products as well the service expenses. The manager of the unit is responsible for cost, quality of
product and promotion. Cost will depend on many factors like labor charge, waste and no of
hours. Revenues will be governed by service level of center, location and other factors. Hence
profit center reflects the picture of organization and local management.
Performance measurement is decided by the variable related to quality, labor utilization; service
availed and material consumed in local unit.
Profit center is closely related to revenue center in SSOG organization because specific charge
for such responsibility center will be included in bill of sales. If there are many privileged
services available at reasonable cost, then it is an example of distributing the money from
revenue center to profit center.
Center
Actual (2005)
Budget
Variance
Profit
$1,419,300
$1,544,500
- $115,200
Profit is also not fulfilling the expectation of budget as it is - $115,200 from estimated profit of
$1,544,500.
Investment center
Investment center takes care of investment in equipment and other capital resources to improve
the process of production and management in the company.
Center
Actual (2005)
Budget
Variance
Investment
$1,673,000
$1,671,000
- $ 2,000
Investment center is consuming $2000 more than expected amount of $1,671,000 in budget. But
it is small gap from the estimated budget. So it can be said as meeting the expectation in close
proximity.
Conclusion
The concept of responsibility center has become important to provide smooth logistics by
applying better controllability. For example, equipment used in the manufacturing cost center
comes under the control of manager for handling production unit responsibility. He can only
manage the requirement of equipment needed for production but he has no control over the price
of equipment. Purchasing department will take the responsibility of controlling the cost of
equipment. So it shows the importance of right set of system in place to handle the assigned
responsibility in effective manner.
Reference:
Kaplan, Robert S. and Bruns, W. Accounting and Management: A Field Study Perspective
(Harvard Business School Press, 1987)