Responsibility Center Definition
In accounting, a responsibility center refers to an organizational subunit in a corporation. For instance, a large corporation may consist of numerous smaller business groups or divisions, some or all of these organizational subunits could be set up as responsibility centers.
The manager of a responsibility center is responsible for the activities of the organizational subunit. In addition, they are responsible for the results of specified financial and non-financial performance measurements. The concept of the responsibility center as an organizational subunit in a larger corporation is a part of the larger concept of a responsibility accounting system.
Furthermore, there are four different types of responsibility centers. These different types include the following:
- Cost centers (sometimes divided into regular cost centers and discretionary cost centers)
- Revenue centers
- Profit centers
- Investment centers
Responsibility accounting is a system of organizational architecture designed to promote goal congruence among managers and employees in a company or organization. It is also intended to appropriately measure and evaluate the performance of people and organizational subunits within the corporation. Many also employ responsibility accounting systems to ensure both responsibility and accountability among the hierarchy of the ranks within the organization.
Types of Responsibility Centers
The following include the types of responsibility centers:
1. Cost Center / Discretionary Cost Center
2. Revenue Center
3. Profit Center
4. Investment Center
Cost center managers are responsible for the incurring as well as controlling costs in their organizational subunit.
Discretionary cost center managers are typically responsible for adhering to a budget.
Revenue center managers are responsible for revenues generated by their organizational subunit.
Profit center managers are responsible for revenues and expenses generated as well as incurred by their organizational subunit.
Investment center managers are profit as well as the capital investments required to generate the profit.
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Hilton, Ronald W., Michael W. Maher, Frank H. Selto. “Cost Management Strategies for Business Decision”, Mcgraw-Hill Irwin, New York, NY, 2008.
Barfield, Jesse T., Michael R. Kinney, Cecily A. Raiborn. “Cost Accounting Traditions and Innovations,” West Publishing Company, St. Paul, MN, 1994.