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RespCenters_Chp4

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Responsibility CentersAn important component of Management Controls – Assigning responsibility for executing strategyTherefore, management controls must includeResponsibility CentersWhat is a responsibility center?Attributes of a responsibility centerExample: A courier service (DHL)Measuring the performance of the courier-terminal responsibility centerMeasuring inputs and outputsConverting the inputs into monetary unitsMeasuring outputsThe input-output attributesWhy does an organization relate input to outputs?EfficiencyEffectivenessEfficiency-Effectiveness Not a compromiseRole of ProfitTypes of Responsibility CentersRevenue CentersRevenue Centers (continued)Expense/Cost CentersExpense centers (continued) Comparing Budgeted and Actual CostsMorton Carpets – Master Budget (Fixed)Morton Carpets – Actual CostsMorton Carpets - Variance AnalysisWhat do we learn from the variance analysis of Morton Carpets?What can we conclude about Morton Carpets?What can managers do to make the numbers comparable and meaningful?Morton Carpets – Flexible Master BudgetSlide 33What did we infer from the flexible budget slides?Cost/Expense center variances – A few pointersProfit CentersProfit Centers (continued)Slide 38Investment CentersAdministrative Centers (support centers)A simple summary of the responsibility centersWhat did we learn from these control system illustrations?An alternative to “Controllability”Responsibility CentersChapter 4 and 5An important component of Management Controls – Assigning responsibility for executing strategyImplementing strategies is not adequate if individuals who must execute them fall short.3-2Therefore, management controls must includeHow responsibility is assigned and measuredHow tasks are measured (not necessarily tasks done by humans but also by machines; e.g. units produced)Task controls such as when to order inventory, why the actual differ from budgeted (the causes)And, not easy to measure or quantify items such as impact on behaviors, intangible assets, and so on.3-33-4Responsibility CentersWhat is a responsibility center?In simple words: an organizational unit for which a manager is made responsible.Examples: A specific store in a chain of grocery stores.A work-station in a production line manufacturing automobile batteries.The payroll data processing center within a firm.Attributes of a responsibility centerIt is like a small business, and its manager isAsked to run that small business and preserve the interests of the larger organization.Goals for the center should be specific and measurable, andShould promote the long terms interests of the organization and should be compatible with other responsibility center activities.Example: A courier service (DHL)Courier operations dispatch trucks to pick up or deliver shipments from local terminals.It could be sent to one or more central terminals and then sorted and redirected.Success of this service would depend on:–Service commitment to customers (on time, without damage) and–Controlling costsLet us suppose that each terminal is treated as a responsibility center.How should the company measure the performance of each terminal, its mangers, and its employees?Measuring the performance of the courier-terminal responsibility centerTo focus on efficiency: we could measure no. of parcels picked up, sorted or delivered, per route, per employee, per vehicle, per hour or per shift.To focus on customer service, we could measure each group’s contribution to customers: proportion of the time the terminal met its deadlines, when terminals are required to sort shipments, what the sorting error rate was.We could also measure customer service by: no. of complaints operations group receives, average time taken by the operation group to respond to complaints, and no. of complaints of poor, or impolite service.Measuring inputs and outputsIn the courier example, the inputs are causal and direct: e.g. no. of packets received to time taken to deliver them.But, such causal and direct relationships are not always possible. For example, how does advertising contribute to increase in revenues?Or, how would you measure the contribution of R & D to product innovation, revenue generation, or cost reduction?Converting the inputs into monetary unitsMost organizations would convert the physical inputs into monetary units when evaluating a responsibility center.No. of units x cost of production, labor hours x per hour rate, etc.Measuring outputsMeasuring outputs is more difficult. This is because:Input may be extended this year but outputs (benefits) may be received over several years (e.g. employee training).It would be difficult to make the causal relationship – e.g. marketing expenses, IT investments, accountants and generation of revenue and profits.The input-output attributesMost organizations use financial controls – cost, revenue, and profits, etc.However, such measures are not applicable to all units within an organization.For example, how would you measure the contribution of a production department? It can only be done on a cost measurement basis.How would you measure the contribution of a sales department – only by revenue generated.Why does an organization relate input to outputs?Because they inherently measure efficiency and effectiveness.Efficiency: ratio of output to inputs;Caution: Do not use ratio of output to input in an absolute sense; but, only in a comparative sense.If Dept. A is more efficient than Dept. B, do not rush to conclusions; examine why Dept. B is less efficient and what can be done about it.Also, comparisons are possible only if Dept. B and Dept. A use comparable outputs and comparable inputs. You cannot compare advertising to accounting.EfficiencyEfficiency is generally measured by comparing actual costs to standard costs.Issues:–Standard costs do not remain stationery.–Recorded costs are often different from actual resources (costs) consumption.Lesson: Establishing a responsibility center is easy; Measuring its efficiency in a reasonable manner is difficult.EffectivenessRelationship between a responsibility center’s output and its objectives (what it was intended to do or perform or deliver).If the output contributes to satisfying the objectives, the more effective it is.The new advertising and marketing efforts has increased awareness and


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