Budgeting Basics and Beyond

22.2. Responsibility Center

A responsibility center is a segment of a company in which controls are used to appraise the manager's performance. These controls include costs, revenues, and investment funds, and a center may be responsible for all three or one.

Responsibility accounting is the system for collecting and reporting revenue and cost information by responsibility centers. It operates on the premise that managers should be held responsible for their performances, those of their subordinates, and all activities within their centers. It is both a planning and a control technique. Responsibility accounting, also called profitability accounting and activity accounting, has these advantages:

• It facilitates delegation of decision making.

• It helps management promote the concept of management by objective, in which managers agree on a set of goals. The manager's performance is then evaluated based on attainment of these goals.

• It permits effective use of the concept of management by exception.

Exhibit 22.1 shows responsibility centers within an organization. Exhibit 22.2 presents an organization chart. Exhibit 22.3 depicts responsibility accounting at various levels.

Responsibility centers can be found in both centralized and decentralized organizations. A profit center often is associated with a decentralized organization and a cost center with a centralized one. However, this is not always the case.

There are lines of responsibility. Exxon Mobil, for example, is organized ...