MANAGEMENT_CONTROL_SYSTEM_Robert_N._Anth.doc - Responsibility Centers Revenue and Expense Centers RESPONSIBILITY CENTERS Nature of Responsibility

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Responsibility Centers: Revenue and Expense Centers RESPONSIBILITY CENTERS Nature of Responsibility Centers A responsibility center exists to accomplish one or more purposes, termed its objectives. The objectives of the company's various responsibility centers are to help implement these strategies. It receives inputs, in the form of materials, labor, and services. Relation between Inputs and Outputs Management is responsible for ensuring the optimum relationship between inputs and outputs. Measuring inputs and outputs In a management control system, physical measurement of quantitative amounts are translated into monetary terms; money is a common denominator that allows the value of several different resources to be combined or compared. Efficiency and Effectiveness Efficiency is the ratio of outputs to inputs, or the amount of output per unit of input. In many responsibility centers, efficiency is measured by comparing actual costs with some standard of what those costs should have been at the measured output. Though this method can be somewhat useful, it has two major flaws: (1) Recorded costs are not precise measures of the resources actually consumed. (2) The standard is merely an approximation of what ideally should have happened under the prevailing circumstances. The Role of Profit A major objective of any profit-oriented organization is to earn a satisfactory profit. Thus, profit is an important measure of effectiveness. Types of Responsibility Centers There are four types of responsibility centers: Revenue centers : Output is measured in monetary terms. Expense centers: Inputs are so measured in profit centers. Profit centers : Both revenues(output) and expenses(input) are measured. Investment centers : The relationship between profit and investment is measured.
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