Comptabilité / Responsability Centers

RESPONSIBILITY CENTERS

I- WHAT IS A RESPONSIBILITY CENTER

1- Definition

A responsibility centre corresponds to:

    - a subdivision of the company,

    - managed by an identified manager

    - having received delegation, i.e. latitude of decision,

    - on the management and/or commitment of specific resources (human, material, financial, etc.),

    - in order to achieve a specific financial objective (quantified and dated, often in the form of a budget).

There are as many types of responsibility centres as there are major types of financial objectives. The type of responsibility centre thus reflects the financial responsibility of the entity concerned, i.e. the type of potential financial consequences of the entity's decisions and actions.

In managerial terms, responsibility centres are one of the essential tools of any decentralization policy. They make it possible to formalize the scope of delegations.

In terms of management control, they support - and therefore a prerequisite - for the implementation of any tool contributing to the setting of objectives (budgeting, planning) and to the measurement of performance (budget monitoring, dashboard).

Conversely, management control facilitates the appropriation by departments of their status as responsibility centres and is an essential means for monitoring their management. It is management control that informs them of the degree of achievement of their objectives, the amount and nature of the resources involved, and most of the key elements, including qualitative ones, of their monitoring.

To summarize :

  - responsibility centres make it possible to determine the nature of the objectives and resources of a management entity,

  - management control tools (such as budget management) make it possible, on the one hand, to quantify each year the objectives and resources of the responsibility centres and, on the other hand, to monitor a posteriori their compliance or degree of implementation.

II-TYPOLOGY OF RESPONSIBILITY CENTRES

Since Richard Vancil ("What kind of management control do you need?", Harvard Business Review, 1973), it is common to consider that there are 5 main categories of responsibility centres.

1-Cost centres (standard)

Their aim is to minimize costs, while producing the expected quantities, with the necessary quality.

This presupposes that production is measurable and that standards can be set, i.e. consumption standards for a given production.

Thus, it must be possible to measure both the effectiveness (compliance with the planned production program) and efficiency (productivity of resources) of a cost centre.

The typical example is the production workshop.

Cost centers are often the most numerous in companies, and most of the time correspond to one or more cost accounting analysis centers

2-Cost centres or discretionary fees or expenses

The production of this type of centre is not measurable, so the effectiveness of the centre cannot be measured. The costs incurred cannot be compared to the production or level of service provided, so there can be no question of controlling efficiency either.

It is just a matter of providing the best possible services without exceeding the overall planned operating budget, which in this case corresponds to an expenditure authorization budget.

The general management, some administrative services, research and development, are typical examples of discretionary cost centres.

Discretionary cost centres tend to have a budget envelope at their disposal as they see fit, without there being even any ex post control on the relevance of its use. Therefore, companies are trying to limit the number of them.

3-Income, revenue or turnover centres

The aim here is to increase turnover without having any possible influence on the selling price, and therefore the goal is essentially to increase sales volume. The centre may also have to comply with a global envelope of commercial costs, which is usually closely linked to the volume of sales.

A typical example is a  simple sales department where marketing decisions are independent from this department, i.e. when it is limited to the sales force and sales administration.

It is the transposition at a commercial level of a standard cost centre, with the volume of sales as the objective of "production", and the commercial costs as the translation of the resources made available.

4-Profit centers

Their aim is to maximize profit, by having the possibility to play on at least two of the following three components of profit: sales volume, sales price, costs. To achieve a profit objective, the manager of a profit center must be able to consider several price/cost/volume strategies, and choose between them fairly freely.

This category of responsibility centre is very broad since it covers both the sales department that has been delegated responsibility for setting the sales price (price / volume arbitration) and the division or agency or branch whose management is similar to that of a mini-company within the company (price / volume / cost arbitration). It also covers the production department whose technical capacity to meet very specific customer needs is crucial for finalizing sales (cost / volume arbitration), etc...

5-Investment or profitability centres

Their purpose is to maximize the return on invested capital, i.e. to achieve a satisfactory result given the level of assets committed by the centre.

Assets must be understood in a very broad sense: they may of course be fixed assets (although senior management frequently reserves decisions on all major investments), but more often they may be current assets such as inventories and trade receivables.

The methods of financing these assets are usually decided by the company's general management, except for "free" financing such as supplier debts, for which it can delegate its authority.

Investment centres may therefore be held liable, as the case may be, for some fixed assets and all or part of their operating working capital requirements (=inventories + operating receivables - operating liabilities).

Every company as a whole is an investment centre; so are the subsidiaries, but also any profit centre that we want to make responsible for the commitment of the assets necessary for its operation.

In practice, companies tend to refer to services as "profit centres" without distinction, which have profit centre, investment centre or even turnover centre objectives.

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