Types of Responsibility Centers ( Accounting)

Types of Responsibility Centers.We often hear terms such as “cost centers” or “profit centers”, in both cases referring to responsibility centers, to which resources, objectives, responsibilities and a budget can be assigned. The following are the types of responsibility centers:

The following are the types of responsibility centers :Types of Responsibility Centers ( Accounting)

• Operating cost center . The activities carried out in this type of center suppose a direct relationship between the cost incurred and the result obtained. The main objective of the center will be to meet or reduce the expected cost, for example, for the purchase or production of products.
• Discretionary Cost Centers . They are those that do not have a direct relationship between the cost incurred and the result obtained, since the expected result is uncertain. Compliance with the assigned budget item is controlled. Typical examples may be research, advertising and marketing, although objectives and guidelines are indicated, the investment made cannot guarantee results. Administration areas can also be included in this category.
• Revenue Centers . They can only decide on issues related to sales or business volume, without being able to say about costs such as production, except for the commercial costs incurred to achieve their income.
• profit centers . They are responsible for decisions regarding their expenses and income, they are evaluated by the benefit they bring to the organization.
• Investment Centers . They are responsible for expenses, income and investments, they are evaluated based on the profitability obtained.

The allocation of costs to products is inappropriate for cost control, since the manufacture of the product may consist of several different operations, all of which are the responsibility of different individuals. The product cost will not therefore pinpoint costs to areas of responsibility. To overcome this problem, costs and revenues must be traced to the individuals who are responsible for their recurrence. This system is known as responsibility accounting. Responsibility accounting is based on the recognition of individual areas of responsibility as specified in a firm’s organization structure. These areas of responsibility are known as ‘responsibility centers’; a responsibility center may be defined as a segment of an organization where an individual manager is held responsible for the segment’s performance.