Which type of responsibility center is a production department in a factory?

Although cost, profit, and investment centers are identified by the responsibilities of the managers of those centers, not all managers fit exactly into one of these categories.

For example, manufacturing managers are commonly treated as managers of cost centers; yet, the manufacturing managers typically influence revenues, even though they are not responsible for pricing.

Revenues are influenced by customer satisfaction due to timely delivery and quality. The manufacturing manager influences timely delivery and quality, so is partially responsible for revenues.

Profit center managers seldom control all aspects of revenues and costs. Profit center managers, however, are usually able to make marginal adjustments to the asset size of the responsibility center. Investment center managers, alternatively, seldom have unlimited authority to increase asset size.

Therefore, identifying the appropriate type of responsibility center is often difficult. Nonetheless, the partitioning of the organization into different types of responsibility centers is important for guiding the choice of performance measures. In particular, it is important to match the performance measures chosen to the responsibilities assigned to the responsibility center.

As managers get more decision making responsibilities because of decentralized management, organizations must find ways to evaluate those managers in an effective way. The first step in the process is assigning responsibility centers to each manager.

A responsibility center is a segment of the company for which a manager is responsible. This allows the company to gather quantitative information regarding the segment in order to assess the performance of the manager. There are four types of responsibility centers:

1. Cost Center – The majority of managers are responsible for cost centers. A cost center is a segment where the manager is only responsible for managing costs. Examples of cost centers include human resource departments and production departments. These departments are not concerned with revenue generation. Therefore, managers are evaluated on their ability to manage costs. When attempting to determine if a segment is a cost center, determine if revenue is a factor. If revenue is not a responsibility of the manager of the department, the department is a cost center.
2. Revenue Center – While revenue is a major factor for most businesses, revenue centers are actually the smallest portion of responsibility centers. Typically, revenue centers are sales territories and sales departments. These managers are evaluated based off their ability to generate revenue. This segment is rare because most managers that are generating revenue are also responsible for managing the costs of generating that revenue.
3. Profit Center – These responsibility centers are also quite common. A profit center manager is responsible for generating revenue but also managing costs to increase profitability. These managers include retail managers, like Target or Wal-Mart store managers. These managers must maximize profitability in their stores, but major decisions about asset management (like renovations and improvements) are outside their scope of responsibility.
4. Investment Center – While we spend a lot of time discussing profit, asset management is just as important. If assets are not managed efficiently to maximize the profit that can be made with those assets, the company runs the risk of hurting cash flow and future profitability. Managers in an investment center are responsible for asset management and profit maximization. These managers have the ability to approve the construction of new factories, stores, and the purchase of major equipment. Investment center managers include CEO’s of major companies and small business owner-managers. If asset management is involved, the segment is an investment center.

A responsibility center is an operational unit or entity within an organization, that is responsible for all the activities and tasks structured for that unit. These centers have their own goal, staffs, objectives, policies and procedures, and financial reports. And are used to balance responsibilities related to expenses incurred, revenue generated, and funds invested to an individual.

In a multinational or large corporation, the organization tasks are divided into a subtask, and each task is given to various small division or groups. In this context, all groups in that organization are responsibility centers.

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Types of Responsibility Centre:

• Cost Centre- A Cost Centre is a department or a unit which supervises, allocates, segregates, and eliminates all sorts of the cost related to a company. The cost center prime work is to check the cost of an organization and to limit the unwanted expenditure the company may acquire. The cost can be the determination of both person and location. In multinational companies, the cost center is authorized to decrease and manage the cost.
• Revenue Centre- This center is accountable for initiating and monitoring revenue. The management does not have any control over the cost or investment but can monitor a few of the expenses in the marketing section. The production of the revenue center is calculated by analyzing the budgeted revenue with actual revenue and actual marketing expenses with budgeted marketing expenses.
• Profit Centre-It is a division or department of a company which operates for the calculation of profit. In an organization, different profit centers are managed by the managers, who identifies profits on the basis of costs and incomes. Profit Centre is accountable for all the actions associated with the sales of goods and production.
• Investment Centre- This center is responsible for both investments and revenue. The investment manager can control expenses, income, the fund invested in assets, etc. He also has the authority to form a credit policy, which has an immediate impact on debt collection.

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The above mentioned is the concept, that is elucidated in detail about ‘Responsibility Centre’ for the Commerce students. To know more, stay tuned to BYJU’S.

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