Responsibility center definition
/What is a Responsibility Center?
A responsibility center is a functional entity within a business that has its own goals and objectives, dedicated staff, policies and procedures, and financial reports. It is used to give managers specific responsibility for revenues generated, expenses incurred, and/or funds invested. This allows the senior managers of a company to trace all financial activities and results of a business back to specific employees. Doing so preserves accountability, and may also be used to calculate bonus payments for employees.
There may be many responsibility centers in a business, but never less than one such center. Thus, a responsibility center is usually a subset of a business. These centers are usually stated on a firm’s organization chart. The use of multiple responsibility centers requires a certain amount of corporate infrastructure to develop each center, track its results, and manage expectations with the various managers.
Accounting for Responsibility Centers
From an accounting perspective, a financial report should be issued to each responsibility center that itemizes the revenues, expenses, profits, and/or return on investment for which the manager of each center is solely responsible. This can result in quite a large number of customized reports being issued on an ongoing basis.
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Types of Responsibility Centers
A responsibility center may be one of four types, which are noted below:
Revenue center. A revenue center is solely responsible for generating sales. A typical revenue center is the sales department, where the sole focus of activity of the sales manager is generating more sales.
Cost center. A cost center is solely responsible for the incurrence of certain costs. A typical cost center is the janitorial department, whose manager tries to keep costs down while still providing a mandated level of service. The IT and accounting departments are also usually treated as cost centers.
Profit center. A profit center is responsible for both revenues and expenses, which result in profits and losses. A typical profit center is a product line, for which a product manager is responsible.
Investment center. An investment center is responsible not only for profits, but also for the return on funds invested in the group's operations. A typical investment center is a subsidiary entity, for which the subsidiary's president is responsible.
FAQs
Can a Department be More Than one Type of Responsibility Center?
A department is typically classified as only one type of responsibility center, cost, revenue, profit, or investment, based on its primary function and control over financial elements. While a department may influence multiple financial outcomes, it is assigned the type that best reflects the manager’s area of accountability. This clear classification helps ensure accurate performance evaluation and managerial accountability.
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