In Budgetary Control, it is crucial that responsibility centre and accounting should be initiated otherwise the managers will not be able to properly understand the company’s goals or objectives.
So what is Responsibility Accounting?
Responsibility Accounting is a system where:
- managers are held responsible for the difference between the actual performance and those budgeted;
- the managers are closely involved in the planning and controlling of the resources and
- has a Responsibility centre which is a division or department in the organization for them to be responsible for their performance.
There are basically the following four types of Responsibility centres:
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COST CENTRE |
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Here, the manager is responsible for costs. Examples like the manager for Purchasing department and Maintenance department |
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REVENUE CENTRE |
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Here, the manager is responsible for generating sales. A typical example is the Sales Department |
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PROFIT CENTRE |
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The manager is responsible for both revenue and cost. The reason been Revenue minus Cost is the Profit. The manager is therefore overall responsible or accountable for making profit for the company. A company has many restaurants which are all profit centre. A manager is assigned to each restaurant to make sure it is a profit centre. |
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INVESTMENT CENTRE |
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An example of an investment centre is a Corporate division responsible for project investments. Here, the manager is responsible for the investments which includes all the revenue, costs and investments (invested capital or assets) |