Lektion 4 - Responsibility centres Flashcards
What is a responsibility centre?
Organizational unit that is headed by a manager who is responsible for its activities
Responsibility centres is often represented by boxes in the organization chart
Exist to accomplish one or more objectives
Are responsible for ensuring optimum relationship between input and output
How is a responsibility center designed?
Inputs
- Resources used: Materials, labour and services
- Measured by monetary costs
Work
- Long term assets: ‘’Property, plant and equipment’’
- Short term assets: Working capital, inventory, receivables
Outputs
- Tangible goods or intangible services
- Internally vs. externally provided
- More complex measurement of value than input
(!) What are the criteria to measure performance?
Efficiency
- Ratio of outputs to inputs
- The amount of output per unit of input
- Often compare actual results against a standard
Effectiveness
- Relationship between output and objectives
- Difficult to quantify
(!) Describe what is meant by a revenue center
- Input not related to output
- Output is measured in monetary terms,
- Control depends on reference point
- Simple and effective way to motivate salespeople
Possible consequences:
- Focus on revenue instead of profit: suboptimization
- Little incentive to manage expenses & working capital
- Little incentive to promote most profitable products
- Wide range of products may increase inventory
- Extended credit terms increases accounts receivable
- Speed up sales may not be in interest of organization
- Internal competition between units
(!) Describe what is meant by a expense/cost center
General
- Inputs measured in monetary terms
- Outputs measured in physical terms
____________
Engineered expense centre:
- Optimum monetary amount of input required to produce one unit of output can be determined
- Usually found in manufacturing operations
- Controlled at the end of year
Possible consequences
- Focus on costs at the expense of quality
- Scaling effect may not be in interest of organization
- Manager might focus on raw material price, not quality or proper amounts
____________
Discretionary expense centre:
- Optimum monetary amount of input required to produce one unit of output cannot be determined
- Control is achieved primarily through non-financial performance measures
- Levels of expenses may change
- Financial control before the expenses are incurred
- Primary job to obtain desired output
- —–> On budget = Satisfactory
- —–> Over budget = Cause for concern
- —–> Under budget = Indicate planned work not done
Possible consequences:
- Goal congruence as ideal system too costly
- Empire building
(!) Describe what is meant by a profit or investment center
General:
- TM often turn most units into a profit center
__________
Profit center:
- Input are related to output
- Financial performance is measured in terms of profit
- Profit measures both effectiveness and efficiency
- Revenue vs. expense tradeoff
- Often far from perfect, but better than cost center
___________
Investment center:
- Profit compared with assets employed in earning it
- Profit vs. asset employed tradeoff
____________
Advantages:
- Improved decision quality: Local manager knowledge
- Free to use imagination and initiative
- Speedier decisions: No wait on top management
- Top management has more time to focus on strategy
- Excellent training ground for general management
- Profit consciousness is enhanced
Disadvantages:
- Delegation leads to some loss of control
- Increased control costs
- Quality of decisions made at unit level may be reduced
- Friction over setting transfer price
- Competent general managers may not exist
- Too much emphasis on short-run profitability
- Business unit competition may lead to dysfunctional decision making
Describe different decision autonomies and controls
Product decision
- Which products or services to make
Marketing decision
- How, where and for how much are these goods or services sold for
Procurement/sourcing/production decision
- How to obtain or manufacture the goods or services
Describe different constraints on authority
Strategic considerations
- Centralized investment decisions
- Specification of allowed activities
Requirement of uniformity
- Uniformity in accounting and control systems
- HR policies
- Ethics
- Select suppliers
How does a functional unit turn into a profitcenter?
Marketing/sales units
- Transfer price required
- Unit is charged with standard cost of products sold
Manufacturing units
- Transfer price
- Credit unit for selling price of their products
- Possible consequences
- —-> A manager may scrimp on quality control, shipping products of inferior quality in order to obtain standard cost credit
- —-> A manager may be reluctant to interrupt production schedules in order to produce a rush accommodate a customer
- —> A manager who is measured against standards may lack the incentive to manufacture products that are difficult to produce or to improve the standards themselves
Service and support units
- Can all be made into profit centres
- Charge (internal) customers for their services
- Managers motivated to control cost in order to prevent customers from going elsewhere
- The receiver is motivated to decide whether to use the service or not
- Often used instead of outside vendors: Control costs
(!) Describe the criteria for assigning responsibilities
- Core operations of the unit & measurement possibilities of input and output
- The organizational structure
- The controllability principle: “Managers should be
assigned responsibility only for revenues, expenses
and/or assets within their control” - Specific strategic concerns
Relate this topics to the case of Volvo
General:
- 20 strategic objectives - Financial & non-financial KPI´s’
- Objectives broken down to local targets & PM-indicators
- All units coordinated though global production system to handle demands on quality and delivery
__________
Which type of RC should truck division be assigned to?
Engineered expense center:
- Overall aim to minimize production losses and gain economies of scale
- Increased operational efficiency already achieved through better utilization of manufactoring plant.
- Each department should know its role in increasing internal efficiency
Profit center:
- Daily decision making as close to customers as possible
- Decentralized decisions keep up with market volatility
