Responsibility Centers for Control

There are different aspects of control concepts for measurement of effectiveness and efficiency at three different levels of management. Similarly there are different control concepts for measuring the effectiveness of various units/divisions of firm.
One of the important ways of measuring performance of sub-functions,divisions and units is to treat them as separate responsibility centers. A Responsibility Center is an activity center of the corporation entrusted with a special task. In modern budgeting and control, financial executives tend to develop responsibility centers for purposes of control.

They can be classified into three categories:

Cost Centers
Profit Centers
Investment Centers

COST CENTER

In the cost center approach , efficiency is measured on the basis of costs incurred in relation to the standard or budgeted costs. Cost center is effective in case of operations such as production,maintenance and certain service departments, as it is not appropriate to measure their efficiency in terms of profits.

PROFIT CENTER

An activity center can be treated as profit center.In this case, the top management of the organisation gives a profit goal to the concerned unit and at the end of the accounting period it can be verified whether the targeted profits have been achieved.

INVESTMENT CENTER

Third approach is to treat the unit under consideration as a Investment Center.In this case, the manager of the unit is required to give a certain percentage return on investment deployed in the unit. The target to the manager is set in this case as a percentage return on investment under his control rather than as a quantum of profits.

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