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Therefore, revenue centers are useful when a company is entering a new market and expects that it will take a lot of time and startup expenses before the center becomes profitable. Therefore, revenue centers are not judged on the amount of costs incurred and revenue is their only performance indicator. Responsibility centers are classified into four different centers.They are cost center, revenue center, profit center and investment center.
Technological advancements have been able to reduce expenses in revenue centers as well as bring non-traditional revenue centers to non-retail companies that work in manufacturing or service industries. This can be done by setting up websites which offer products directly from the supplier. This reduces cost by shortening the distribution channel and cuts out wholesalers and retailers.
However, it becomes important for management to realize that one should not be too focused or process-oriented, which would cripple the initial objects set. A company is most likely to sabotage itself by doing so when it focuses on the hierarchical scheme of things. As a result, outcomes may not be achieved, and targets may just become numbers to frown upon. The inputs and the outputs of the profit centres should be capable of separate measurement.
Types of Responsibility Centres
Often a division of a company is a profit center because it has control over its revenues, costs, and the resulting profits. Unless the division is large enough, it should not be treated as a profit centre. A small workshop or a section of a department, for instance, can not be regarded as a profit centre. Business unit managers should have sufficient freedom to take operating decisions on a profit-oriented basis, for example, regarding purchase, product mix, pricing and inventory.
- An investment centre manager is accountable for all costs, revenues, and capital investment.
- The output of a centre may be undertaken either for outside consumers or for other centres in the same organisation.
- A revenue center becomes a profit center if the latter is encompassed, thus making a profit center a blend of both a cost and revenue center.
By this, the need for apportionment of common input and output is minimised if not altogether eliminated. This makes it essential that the boundaries of different profit centres/divisions be clearly demarcated to preclude overlapping of activities. In the absence of well-defined boundaries and consequent overlapping of operations, unit managers may tend to take credit for everything that goes well and blame the other division for whatever goes wrong. The primary goal of a profit centre is to earn the desired level of profit.
Examples: What Are Examples of Profit Centers?
It is a centre mainly devoted to raising revenue with no responsibility for production. The main responsibility of managers of such centres is to generate sale revenue. Such managers have nothing to do with the cost of manufacturing a product or in the area of investment of assets. But he is concerned with control of marketing expenses of the product. An expense centre is a responsibility centre in which inputs, but not outputs, are measured in monetary terms. Responsibility accounting is based on financial information relating to inputs and outputs .
Which of the following responsibility centers usually makes a Manager for all fi… Which of the following responsibility centers are also referred to as ‘engineere… Which one of the following responsibility centers is most likely to be the respo… A profit centre may be subsidiary company within a group or division in a company.
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I dont know what is a responsibility center within the accounting context. However, in other organisations, such independence may not be found. Top management does not allow profit centre divisions to buy from outside sources if there is idle capacity within the firm. In other words, a profit centre refers to a centre in charge of developing methods and avenues to earn the highest possible profit on a product or any other business activity through market research. Furthermore, it identifies locations for exposure, aids in the formulation of sales policies, and suggests ways to add more value to the product at the same or lower cost. Service cost centres are those that provide services to other cost centres.
Revenue center managers should not be allowed to make marketing decisions. For example, if a revenue center manager is allowed to set the revenue target, he will maximise revenue. Furthermore, it could be argued that pure revenue centers do not actually exist because no part of an organization operates without expending some business resources.
Cost of administration and support services such as employee training, legal advice, research and development, etc. The optimal rupee amount of input required to produce one unit of output can be established. Course Hero is not sponsored or endorsed by any college or university.
Mostly profit centres are created in an organisation in which they sell products or services outside the company. In some cases, profit centres may be selling products or services within the company. For example, repairs and maintenance department in a company can be treated as a profit centre if it is allowed to bill other production departments for the services provided to them.
This is a centre whose performance is measured in terms of both expenses it incurs and revenue it earns. Thus a factory may constitute a separate profit centre and sell its production to other department or the sales department. Responsibility accounting is a management control system based on the principles revenue centre is accountable for of delegating and locating responsibility. Responsibility accounting is a system under which managers are given decisions making authority and responsibility for each activity occurring within a specific area of the company. Under this system, managers are made responsible for the activities of segments.
It comprises research and development, accounting and human resource departments. The output of discretionary expense centre cannot be measured in monetary terms. They include administration and support units, research and development organization and most marketing activities. The performance of a revenue center is measured based on its output, where the objective is to meet or exceed the budgeted sales revenue and profit margin targets.
An impersonal cost centre is one that comprises a place or piece of equipment . The authorities identify the deviations between budgeted and actual targets. Delegation of authority and responsibility to make managers more responsible. Here, all the levels of the organization from top to bottom are part of this accounting process. Responsibility calculations at each level of the organization enhance the overall performance.
Production and service departments are good examples of cost centres in a manufacturing firm. Engineered expense centre usually are found in manufacturing operations. Warehousing, distribution, trucking and similar units in the marketing organization also may be engineered expense centre and so many certain responsibility centre within administrative and support department. In an engineered expense centre the output https://1investing.in/ multiplied by the standard cost of each unit produced represents what the finished product should have cost. When this cost is compared to actual costs, the difference between the two represents the efficiency of the organization unit being measured. A cost or expense centre is a segment of an organisation in which the managers are held responsible for the cost incurred in that segment but not for revenues.
Differences between Cost Centre and Profit Centre
The four responsibility centres generally created are Cost, Revenue, Profit and Investment. The Investment, Profit and Cost centres are the sub-divisions of the firm. The departments conduct a comparative evaluation of the actual with budgeted targets. That helps in estimating the responsibility of the centre manager. For example, a department store may consider each department within the store to be a revenue center, such as men’s shoes, women’ shoes, men’s clothes, women’s clothes, jewelry, and so forth. It is centre whose performance is mainly measured by the contribution it earns.
Consumers using mobile devices may be willing to buy more products directly from manufacturers, enhancing revenue. Many people burned out trying to raise their departments income stats. What saved me was coming up with ideas to pull in Internet revenue. MissMuffet May 14, 2011 While I can see the reasoning behind increasing sales and profit margins I find this approach quite annoying. Last month I started a belly dance class, and before we even met the teacher there was someone from the gym trying to sell us special costumes, jewelry and scarves to ‘enhance the experience’. In my opinion it doesn’t matter whether a business runs a dedicated center or, as Windchime mentioned, expects staff to come up with ideas.
Also, a marketing department, a sales region or a single sales representative can be defined as a cost centre. Cost centre may vary in size from a small department with a few employees to an entire manufacturing plant. Hotels may add a restaurant or banquet room as an additional revenue center for the business. Companies may add revenue centers as a means to enter new markets or industries.