In decentralized management, the managers get more responsibilities to perform their work, and the best way to evaluate their performance is to assign the supervision of a responsibility centre.
What is Responsibility Accounting?
Responsibility accounting is based on the concept that every type of cost that a business incurs must be accountable by a person. Responsibility accounting places a particular emphasis on the responsibility of controlling costs.
It is a system that involves identifying the responsibility centres and their objectives, developing schemes to measure performance for them, preparing and analyzing performance-based reports of individual responsibility centre.
Advantages of Responsibility Accounting
Responsibility accounting has the following benefits:
- As the responsibilities are delegated among the various middle-level managers, the top management can focus more on strategic decision making.
- It promotes the concepts of management by objective and management by exception.
- It provides a platform in which performance can be evaluated.
What is Responsibility Center?
A responsibility centre is a segment of an organization for which a particular in-charge is assigned. Based on the functions of an organization, there are four types of responsibility centers that are present, which are:
- Cost Center
- Revenue Center
- Profit Center
- Investment Center
Cost Center: This type of responsibility centre deals with managing costs. These centres are not concerned with any revenue generation. Hence, managers are evaluated based on how they manage costs. The best example of such a centre is the human resource department.
Revenue Center: Revenue centres are those that are directly involved in generating revenue for the company. The sales department is the best example of a revenue centre. Here the managers are evaluated based on their
Profit Center: The role of a profit centre is to generate revenue as well as manage costs so that they can generate profit for the organization. The manager is evaluated based on his/her ability to deliver profits for the business.
Investment Center: These centres are responsible for managing assets which are of great significance for an organization. The managers are concerned with profit generation as well as the management of assets. These can include setting up of new factories or the approval for the purchase of new equipment.
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