As managers get more decision making responsibilities because of decentralized management, organizations must find ways to evaluate those managers in an effective way. The first step in the process is assigning responsibility centers to each manager.

A responsibility center is a segment of the company for which a manager is responsible. This allows the company to gather quantitative information regarding the segment in order to assess the performance of the manager. There are four types of responsibility centers:

  1. Cost Center – The majority of managers are responsible for cost centers. A cost center is a segment where the manager is only responsible for managing costs. Examples of cost centers include human resource departments and production departments. These departments are not concerned with revenue generation. Therefore, managers are evaluated on their ability to manage costs. When attempting to determine if a segment is a cost center, determine if revenue is a factor. If revenue is not a responsibility of the manager of the department, the department is a cost center.
  2. Revenue Center – While revenue is a major factor for most businesses, revenue centers are actually the smallest portion of responsibility centers. Typically, revenue centers are sales territories and sales departments. These managers are evaluated based off their ability to generate revenue. This segment is rare because most managers that are generating revenue are also responsible for managing the costs of generating that revenue.
  3. Profit Center – These responsibility centers are also quite common. A profit center manager is responsible for generating revenue but also managing costs to increase profitability. These managers include retail managers, like Target or Wal-Mart store managers. These managers must maximize profitability in their stores, but major decisions about asset management (like renovations and improvements) are outside their scope of responsibility.
  4. Investment Center – While we spend a lot of time discussing profit, asset management is just as important. If assets are not managed efficiently to maximize the profit that can be made with those assets, the company runs the risk of hurting cash flow and future profitability. Managers in an investment center are responsible for asset management and profit maximization. These managers have the ability to approve the construction of new factories, stores, and the purchase of major equipment. Investment center managers include CEO’s of major companies and small business owner-managers. If asset management is involved, the segment is an investment center.

Share This:

Related pages

full absorption costinghow to calculate profit margin per unitact payroll tax ratecalculating payroll taxesbreak even point in unit sales formulacalculate pv of bondcogs includesis bad debt expense on income statementcalculating tax on paycheckdirect labor and indirect laborbank reconciliation statement easy methodwhat is fixed expensecompute the predetermined overhead rate for each departmentformula to calculate cogsjournal entries for dividends200 percent declining balance methodfinancial accounting journal entries examplesexplain bank reconciliationfica taxes payabledefinition of normal balancewhat is relevant cost in accountinghow to calculate roi from financial statementspayroll tax formulahow to calculate gross margin per unitjournal entries for unearned revenueaccrued taxes journal entrypaid creditors on account journal entryaverage costing methodpresent value of annuity chartblank income statement and balance sheethow to calculate the contribution margin per unitfifo perpetualaccrued revenue adjusting entrycalculating break even point in dollarsrecording bad debt expense journal entrydepreciation journal entrycalculate the predetermined overhead rateformula for beginning inventoryonce the estimated depreciation expense for an asset is calculatedassets turnover formuladepreciated book valuenet realizable value of accounts receivable formulauncollectible accounts journal entryclosing entries for a corporationuseful life of furniture for depreciationcopier lease calculatormanagement accounting formulasprepare a general ledger using t accountsexamples of fixed cost and variable cost in manufacturingcalculate fixed cost per unitprice taker price makeraccounting wages payabledollar value lifo calculatorthe manufacturing cost per unit for absorption costing isannual depreciation under declining-balance methodpost the closing entries to income summarybond discounts and premiumsmeaning of job costingsales returns accountingcost accounting overheadswhat account has a normal debit balancedirect manufacturing labordeclining depreciation calculatorexample of adjusting entrycalculate net credit saleswrite off receivableshow to find fica taxwhat is double declining balance methodfifo periodic inventory methodcompute the predetermined overhead rate for each departmenttrial balance worksheet exampleannual depreciationis notes payable a debit or creditdeferred revenue adjustmententry for allowance for doubtful accountsaccrued interest bonds