Survey of Accounting: The Maze of Numbers Accounting 220 Responsibility Centers.

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Presentation transcript:

Survey of Accounting: The Maze of Numbers Accounting 220 Responsibility Centers

What is a Responsibility Center? The Responsibility is the unit in the organization that has control over costs, revenues, or investment funds.

Responsibility Centers further defined It is an organization unit for which a manager is made responsible. The center’s manager and supervisor establish specific and measurable goals for the responsibility center. The goals should promote the long-term interest of the organization.

The basic definition of a responsibility center Lowest organizational level at which funds control functions are carried out. Generally the same as divisions in an operating component.

For accounting purposes, responsibility centers have four classifications: Cost Centers Revenue Centers Profit Centers Investment Centers

Cost Centers Part of a business to which a cost is allocated for the purposes of strategic planning. Cost centers can be large divisions of a business, departments, small teams, or even individuals

Revenue Center A Revenue Center is responsible for selling an agreed amount of products or services. It's manager is usually responsible to maximize revenue given the selling price (or quantity) and given the budget for personnel and expenses.

Profit Center Profit Centers are parts of a corporation that directly add to its profit. Managers are held accountable for both revenues, and costs (expenses), and therefore, profits. Usually the different profit centers are separated for accounting purposes so that the management can follow how much profit each center makes and compare their relative efficiency and profit.

Investment Centers An investment center is a classification used for business units within an enterprise. The essential element of an investment center is that it is treated as a unit which is measured against its use of capital, as opposed to a cost or profit center, which are measured against raw costs or profits.

Investment Centers, continued The advantage of this form of measurement is that it tends to be more encompassing, since it accounts for all uses of capital.

Incremental Analysis in the Responsibility Center Incremental analysis is used to find the impact of changes in costs or revenues, given a specific potential scenario. Decisions involving incremental analysis include the following: Make or buy (Profit Center) Sell or process further (Revenue Center) Special order (Cost Center) Changes in production and/or technology (Investment Center)