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Responsibility Centres

A small organisation can effectively manage the business with an individual or few people of the organisation. But in the case of large scale organisation, it is difficult to supervise by an individual or few people. In order to have an effective control of the entire acivities, the large scale organisation can be divided into some small divisions or departments. each and every unit has a separate manager and it performs its activities properly. The small units or divisions of enterprise for the purpose of effective control of its activities are called responsibility centres.

 

According to Richard D. Irwin, “A responsibility centre is a unit of an organization under the supervision of a manager who has the responsibility for the activities of that responsibility centre.”

 

Responsibility centres, for the planning and control purposes, are classified into the

following classes :

 

(i) Cost centre or Expense centre

(ii) Revenue Centre

(iii) Profit centre

(iv)  Investment centre.

(i)                 Cost Centre. A cost centre or expense centre is a division of an organisation in which the manager is held responsible for the costs incurred in that division. Simply, a responsibility centre is called a cost centre when the manager is solely responsible only for cost incurred in that centre.

 

(ii)               Revenue Centre.A revenue centre is a unit of the organisation which is ultimately responsible for sales revenue. A manager, under this division, does not possess control over cost, but he has to control the expenses of marketing department.

 

(iii)             Profit Centre. A responsibility centre is called a profit centre where the manager is held responsible for both costs and revenues. In the profit centre, input and output values are measured in monetary terms.

 

Investment Centre. A responsibility centre is called an investment centre. Its manager is responsible for costs and revenues as well as for the investment in assets used by his centre. It is defined as a responsibility centre in which inputs are measured in costs and outputs are measured in terms of revenue.