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Responsibility Center

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:

Responsibility Accounting

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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Responsibility Center

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Responsibility Center

 

Sources:

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.

 

See Also:
Service Department Costs
Transfer Pricing
Value Drivers: Building Reliable Systems to Sustain Growth
Value Chain
Cost Driver

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Cost Center

See also:
Cost Driver
Variable vs Fixed Cost
Sunk Costs
Activity Based Costing vs Traditional Costing
Removal Cost
Profit Center
Responsibility Center
Adding Value as a Financial Leader

Cost Center Definition

In accounting, a cost center is a type of responsibility center. A responsibility center is an organizational subunit the manager of which is responsible for certain financial and non-financial performance measures. For accounting purposes, consider a responsibility center – in this case a cost center – a distinct entity within the context of the larger organization.

Furthermore, a cost center is an organizational subunit that incurs cost but does not directly contribute to the company’s profits. In fact, a cost center may not generate any revenues at all. The manager in a cost center has the authority to incur costs related to normal business activities and operations. Furthermore, a cost center manager’s primary goal is to contain and control the subunit’s costs. As a result, the manager of a cost center is evaluated on the basis of cost containment and control.

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Cost Centers and Discretionary Cost Centers

In addition, make a distinction between cost centers and discretionary cost centers. The difference is with the relation between inputs and outputs in the production process.

When there is a well-defined relation between inputs and outputs in the production process, the organizational subunit is a cost center. For example, a manufacturing process is a regular cost center because each unit of output requires a measurable input of raw materials and a measurable amount of direct labor time. Furthermore, in this type of process, it is easy to see the relationship between the cost-incurring inputs and the revenue-generating outputs.

When there is not a well-defined relation between inputs and outputs in a business activity, the organizational subunit is a discretionary cost center. A good example of a discretionary cost center is an administrative department where the work of the administrators is not clearly linked to any tangible or measurable output. It is not easy to see the relationship between the cost-incurring inputs and any type of revenue-generating outputs.

Examples

Cost centers are typical business units that incur costs but only indirectly contribute to revenue generation. For example, consider a company’s legal department, accounting department, research and development, advertising, marketing, and customer service a cost center. The managers in charge of these departments can control and contain costs – and they are evaluated on their ability to control and contain costs. But there is not much they can do to directly impact the company’s revenues. If you want to identify your cost centers and know how they fit within your economics, then download your free guide here.

cost center

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Access your Projections Execution Plan in SCFO Lab. The step-by-step plan to get ahead of your cash flow.

Click here to access your Execution Plan. Not a Lab Member?

Click here to learn more about SCFO Labs

cost center

Sources:

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.

 

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