9 3 Describe the Types of Responsibility Centers Principles of Accounting, Volume 2: Managerial Accounting

The department earned $3,891 of profit in December but would have earned, based on the estimates, $3,892 if the department added the children’s play area. Now let’s examine how the manager of the children’s clothing department would evaluate a potential investment opportunity. Assume in December the manager how to write the articles of incorporation for a nonprofit had an opportunity to invest to upgrade the store by adding a supervised children’s play area for children to use while parents shopped. The manager believes this enhancement might increase sales because parents could take their time shopping, while knowing their children are safe and having fun.

Customers who have a bad experience in one of the chain’s hotels are less likely to try its hotels in other locations. Therefore, the evaluation of profit center managers commonly includes other performance measures, such as quality and customer satisfaction, in addition to profits. For managers, the upside of using more assets is the resulting increases in sales and profits. Well, nothing; managers of profit centers aren’t held accountable for the assets that they use. Profit centers are businesses within a larger business, such as the individual stores that make up a mall, whose managers enjoy control over their own revenues and expenses.

• ABC Manufacturing is a medium-sized manufacturing company that produces automobile parts.
• The center was given targets for revenue growth and customer acquisition targets and was expected to report regularly on progress toward these targets.
• A segment is a fairly autonomous unit or division of a company defined according to function or product line.

(Figure)A system that establishes financial accountability for operating segments within an organization is called ________. Companies want to be sure the investments they make are generating an acceptable return. Additonally, individual investors want to ensure they are receiving the highest financial return for the money they are investing. (Figure) shows an example of what the cost center report might look like for the Apparel World custodial department. By allocating resources in this way, companies can ensure that each department or division is focused on its specific area of expertise, which can improve overall efficiency and effectiveness.

Chapter 9 LO 3 — Describe the Types of Responsibility Centers

As an important part of responsibility-based accounting, such a center helps break down a large organization, such as a corporation or franchise business, into easily analyzed segments. Responsibility centers may have different functions, and are usually classified as cost centers, profit centers, or investment centers. A review of the department’s expenses shows increases in all expenses, except department manager wages and cost of accessories sold. When reviewing the profit center report, pay special attention to how the differences between the actual and budgeted expenses are calculated in this analysis.

• Adding the percentages to the financial analysis allows managers to more directly make comparisons, to separate departments in this case.
• In the wake of the COVID-19 pandemic and escalating tensions with China, American companies are actively seeking alternatives to mitigate their supply chain risks and reduce dependence on Chinese manufacturing.
• You’ve correctly implemented responsibility accounting when you have at least one person responsible for each revenue and expense account in the company’s chart of accounts.
• Responsibility accounting is a system of organizational architecture designed to promote goal congruence among managers and employees in a company or organization.

The process involves assigning the responsibility of accounting for particular segments of the company to a specific individual or group. 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. As part of your new role in the accounting department, you have been tasked to set up a responsibility accounting structure for the company.

Advantages of Responsibility Center

The review also highlighted an area for improvement in the department—increasing accessory sales—which is easily corrected through additional training. While this appears to be good news for the department, recall that clothing accessories revenue dropped by $800. Therefore, the department profit margin decreased by a net amount of $224 versus expectations ($800 revenue decline and a corresponding expense decrease of $576). 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.

Chapter 9: Responsibility Accounting for Cost, Profit and Investment Centers

You can maximize profitability by gleaning what types of inventory are earning the most. Even if you can count your employees on your own 10 fingers, there’s still value in using responsibility accounting. On small teams, each employee has a significant role to play in the success of your company. A business that implements responsibility accounting develops clear expectations for its employees, can provide new insights into profitability, and prepares itself for growth.

FAQs on Responsibility Center

These purchases can significantly affect your business, and those responsible for big purchasing decisions should be evaluated on the asset’s impact on the business’s bottom line. Additionally, by focusing resources on specific business areas, companies can more easily adapt to changes in the competitive landscape or industry trends. Here, a unit dedicatedly looks into investment-related matters while another team identifies the target market for maximum profit. The company often invests huge capital to carry out large business operations or expand.

To improve return on investment, the manager can either increase controllable margin (profits) or decrease average operating assets (improve productivity). This flaw in the evaluation of profit centers can be addressed by carefully monitoring how profit centers use assets or by simply reclassifying a profit center as an investment center. Revenue centers usually have authority over sales only and have very little control over costs.

Recently, large companies have tended to organize segments according to product lines such as an electrical products division, shoe department, or food division. This includes providing staffing, equipment, and budgetary resources to support their operations. This can include sharing best practices, working on cross-functional projects, and supporting each other to attain their targets. Responsibility centers are designed to provide autonomy and accountability to each center, but balancing autonomy and collaboration is essential.