Which responsibility Centre is responsible for revenue expenses and capital investment decisions?

A segment is a fairly autonomous unit or division of a company defined according to function or product line. Traditionally, owners have organized their companies along functional lines. The segments or departments organized along functional lines perform a specified function such as marketing, finance, purchasing, production, or shipping. Recently, large companies have tended to organize segments according to product lines such as an electrical products division, shoe department, or food division.

A responsibility center is a segment of an organization for which a particular executive is responsible. There are three types of responsibility centers—expense (or cost) centers, profit centers, and investment centers. In designing a responsibility accounting system, management must examine the characteristics of each segment and the extent of the responsible manager’s authority. Care must be taken to ensure that the basis for evaluating the performance of an expense center, profit center, or investment center matches the characteristics of the segment and the authority of the segment’s manager. The following sections of the chapter discuss the characteristics of each of these centers and the appropriate bases for evaluating the performance of each type.

An expense centeris a responsibility center incurring only expense items and producing no direct revenue from the sale of goods or services. Examples of expense centers are service centers (e.g. the maintenance department or accounting department) or intermediate production facilities that produce parts for assembly into a finished product. Managers of expense centers are held responsible only for specified expense items.

The appropriate goal of an expense center is the long-run minimization of expenses. Short-run minimization of expenses may not be appropriate. For example, a production supervisor could eliminate maintenance costs for a short time, but in the long run, total costs might be higher due to more frequent machine breakdowns.

A profit center is a responsibility center having both revenues and expenses. Because segmental earnings equal segmental revenues minus related expenses, the manager must be able to control both of these categories. The manager must have the authority to control selling price, sales volume, and all reported expense items. To properly evaluate performance, the manager must have authority over all of these measured items. Controllable profits of a segmentresult from deducting the expenses under a manager’s control from revenues under that manager’s control.

Closely related to the profit center concept is an investment center. An investment center is a responsibility center having revenues, expenses, and an appropriate investment base. When a firm evaluates an investment center, it looks at the rate of return it can earn on its investment base.

Typical investment centers are large, autonomous segments of large companies. The centers are often separated from one another by location, types of products, functions, and/or necessary management skills. Segments such as these often seem to be separate companies to an outside observer. But the investment center concept can be applied even in relatively small companies in which the segment managers have control over the revenues, expenses, and assets of their segments.

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In a large organisation, tasks are subdivided amongst smaller groups that focus on a particular objective. These small groups work synchronously to achieve the organisational goal. 

These small subgroups are known as responsibility centre. Each have their targets and objectives which they need to achieve within a defined timeframe. These subgroups have their resources, procedures, financial reports, and responsibilities divided so that they can function independently and contribute towards the common objective. 

The accountabilities given to these responsibility centres can be related to cost incurred in the process. It can also be investment-related, profit-related or revenue-related. 

Let us take an example to understand the role of these subgroups in an organisation. 

KLM enterprise, manufactures a range of denim wear like shirts, pants, tops, Kurti, etc. The company need capital investment from time to time to carry out large business operations. And like every other business, they produce goods and sell them in the market to generate revenue. 

Now, seeking the best investment option is quite different a task than looking for a profitable market where one can sell goods to maximise profit. And in a large organisation, every job is divided into subgroups. 

Here, there is a group which dedicatedly deals with investment-related decisions and another which determines the target market to sell products out of several other subgroups. These subgroups are different types of responsibility centres. 

From the above example, one can conclude that each such subgroup has defined targets which they need to achieve. And large organisations specially divide their work into smaller sections and assign each responsibility centre with one task. 

Further, depending upon the type of task and duty they are assigned with, these can be segregated in various kinds. 

Types of Responsibility Centres 

Below mentioned are the 4 types which every large organisation has.

1. Investment Centre 

Investment centres are the subgroups in an organisation which is responsible for making any investment-related decisions. From the acquisition of funds to collection of debts, every cost and revenue related activity comes under this section. 

The manager handling these subsections needs to assign tasks and make the right decision regarding investment. In business, there are times when the available working capital isn’t enough to carry the necessary business operations. 

In such times, businesses have to look for sources of investment, be it external source or internal source. They need to decide if they will borrow from financial institutions and other sources or want to acquire funds by liquefying an asset. All these decisions are taken by these types of responsibility centres.

1. Cost Centre 

An expense centre or cost centre’s responsibilities are confined to cost incurred in various business operations. They are responsible for budget planning and cost control for various services in different departments in an organisation. 

To put simply, cost centres are responsible for managing costs of operation for various departments and units. They can direct the accounting department, production department, human resource department, maintenance department, etc. 

Lets take an example.

A product based company may treat various individual departments as cost centre units wherein the respective managers act as cost centre managers. These managers further report to the plant manager regarding cost-related matters. Or, there can be a dedicated department which handles the cost operations of all other departments working in the organisation.

1. Revenue Centre 

A revenue centre is responsible for generating and managing all the revenues a business makes. Though these types of responsibility centre can’t interfere in the matters of cost and expenses, they may have a say on budgeted marketing expenses.

Revenue centres can assess the estimated expenditures for marketing with the actual price and develop ways to generate more revenues for the organisation. Here, sales representatives, marketing managers, etc. can be a part of this revenue centre.

1. Profit Centre 

A profit is the surplus amount of revenue that a company generates, after excluding the total cost of operation. A profit centre is concerned with the profit earned by a company as they manage and operate different functions of sales. 

The entire team works upon the sales strategy and marketing tactics so that they can improve the earned profit percentage. So, departments handling tasks of sales and expenses are a part of the profit centre. 

Now that you have learned the basic concept of responsibility centres and their importance in the organisation test your understanding by answering these questions yourself. 

Test Your Knowledge 

1. Choose the Correct Option Which Holds True for a Responsibility Centre 

1. Controlling costs isn’t a part of its operations 

2. It may lead to conflicts within departments 

3. It concentrates dedicatedly towards the product, outcome, and process 

4. None of the above 

1. Choose the One(s) Which are Responsibility Centres 

1. Expense centre 

2. Profit centre 

3. Investment centre 

4. All of the above 

1. The Responsibility Centre is Segregated into How Many Types 

1. Three 

2. Four 

3. Two 

4. None of the above 

With such pointers, it will be easier for students to understand the concept of responsibility centre. However, for a more comprehensive understanding of the idea, students can download Vedantu’s app and start learning in-depth. Students will be able to understand the topics precisely by adhering to the study material prepared by experienced tutors.

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Which responsibility Centre is responsible for revenue expenses and capital investment decision?

Which responsibility center is responsible for revenue expenses?

What are the 4 types of responsibility centers?

What is revenue center in responsibility accounting?