1. Responsibility Centers
Chapters 3 & 4,
Management Control Systems, 12th Ed.,
Anthony and Govindarajan

2. Strategy (From Previous Lecture)
Corporate Strategy
To maximize use of resources
Business Strategy
To compete in selected markets

3. Goals and Strategy (From Chapter 1)
Strategy Formulation
Goals
How to attain
Strategy Implementation (Execution)
Objectives
Management Control Systems

4. Where Are We Going??? Develop a Strategy
Develop Goals (to support the strategy)
Develop Objectives (to achieve the goals)
Refine Organizational Structure (in support of the objectives)
Develop Evaluation Items (in support of achieving the objectives)
Assign Responsibility Centers (within the organizational structure)

5. Responsibility Center
An organizational unit with a manager responsible for its activities
Usually refers to a unit within the organization
Exists to accomplish an objective

6. Inputs & Outputs Optimum relationship between inputs and outputs
Within management control system, must be measurable
Unit measurements
Hours of labor, quantities of materials, etc.
Monetary measurements
Costs, revenues

7. Efficiency & Effectiveness
Not mutually exclusive
Two criteria used to judge responsibility centers
Efficiency:
Ratio of outputs to inputs
Higher is better!
Effectiveness:
Relationship of output to predetermined objectives
Again, higher is better!

8. Types of Responsibility Centers
Revenue centers
Expense centers (cost centers)
Profit centers
Investment centers [Chapter 6]

9. Revenue Center Output, and only output, is measured
Measurement is normally in monetary terms
Typically, sales/marketing
Cannot set price
Have no control over costs

10. Expense (Cost) Center Inputs, and only inputs, are measured
Measurement is normally in monetary terms
Two types
Engineered expense centers
Optimal relationship between inputs and outputs
Discretionary expense centers
Optimal relationship cannot be established between inputs and outputs

11. Conflicts & Goal Congruence
Managers of revenue and expense centers
May seek excellence at high costs
Many $$$ for slight improvement in output
May seek output rather than quality
Increase of lesser quality products
Need special budgetary controls
Must consider goal congruence

12. Profit Center Both inputs and outputs are measured
Measurement is in monetary terms
Inputs are related to outputs

13. Profit Center Two conditions must be met to create a profit center
Relevant information must be available
Effectiveness of managers decisions must be measurable

14. Business Units Full autonomy – normally not feasible
Goal congruence – risk of loss increases
Capital Budgeting – normally limited

15. Selection of Measurement Items
If manager can influence an item, it could/should be used as a measurement of performance
Total control is not necessary
Degree of control is relevant

16. Remember Two Things
Not all units within an organization need to be the same!
Profit centers do not have to make a profit!