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Chapter 6: Problem 13

Explain how the choice of the type of responsibility center (cost, revenue, profit, or investment) affects behavior.

Short Answer

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The choice of responsibility center affects behavior in an organization by setting priorities and performance measures that shape employees' actions. Cost centers prioritize cost control and efficiency, while revenue centers focus on sales growth. Profit centers balance both cost control and revenue generation, and investment centers aim to optimize long-term capital investments and assets. This results in varying motivations and strategies in each type of center, ultimately influencing the organization's overall performance.

Step by step solution

01

Understanding Responsibility Centers

Responsibility centers are divisions, departments, or teams within an organization that are responsible for specific tasks or functions. They can be categorized into four types: cost centers, revenue centers, profit centers, and investment centers. Each type of responsibility center has different performance measures and priorities, which affect the behavior of individuals working within those centers.
02

Cost Center

A cost center is a department or division that focuses on controlling and minimizing costs. Managers in cost centers are responsible for maintaining cost efficiency, and their performance is evaluated based on their ability to control costs without impacting the quality of the products or services. Their main priority is to minimize expenses in order to maximize the company's overall profit margin. Behavior in cost centers tends to be focused on finding ways to cut expenses and improve efficiency. Employees may be motivated to identify cost-saving initiatives, optimize processes, and reduce waste.
03

Revenue Center

A revenue center is a department or division that is responsible for generating sales or revenue for the organization. Managers in revenue centers are accountable for increasing sales and their performance is evaluated based on their ability to bring in more revenue for the company. Behavior in revenue centers is oriented towards sales and increasing market share. Employees may be motivated to develop innovative marketing strategies, pursue new customers, and drive sales growth.
04

Profit Center

A profit center is a department or division that is responsible for both generating revenue and managing costs to maximize profits. Managers in profit centers are evaluated on their ability to balance revenue generation and cost control to achieve the optimal profit margin for the company. Behavior in profit centers is more balanced between cost control and revenue generation. Employees are motivated to not only increase sales but also to find ways to optimize processes and minimize costs in order to increase profitability.
05

Investment Center

An investment center is a department, division, or subsidiary of the organization responsible for managing long-term capital investments and assets to achieve the company's financial objectives. Managers within investment centers are held accountable for the returns generated on investment projects and for the effective allocation of resources. Behavior in investment centers is focused on evaluating and selecting investment opportunities that generate positive returns for the organization. Employees may be motivated to carry out detailed analyses on investment opportunities, manage risks associated with investments, and pursue value-creating initiatives. In conclusion, the choice of the type of responsibility center 鈥� cost, revenue, profit, or investment 鈥� affects behavior within an organization by shaping the priorities, performance measures, and motivational factors for individuals working within those centers.

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Key Concepts

These are the key concepts you need to understand to accurately answer the question.

Cost Centers
In a cost center, the primary focus is on minimizing and controlling costs within a particular department or division. This is crucial because the efficiency of cost management directly impacts the overall profitability of an organization. Managers in cost centers are tasked with the responsibility of ensuring cost-effective operations without compromising on the quality of products or services.

Because of this responsibility, the behavior in cost centers typically involves a vigilant approach toward identifying cost-saving opportunities. Employees are encouraged to find ways to optimize resources, eliminate waste, and improve process efficiencies.
  • Focus on minimizing expenses
  • Efficiency in operations
  • Sustain quality while cutting costs
Overall, the aim is to contribute to the company's bottom line by ensuring that costs are managed efficiently.
Revenue Centers
Revenue centers prioritize the generation of income through sales and other revenue-producing activities. These centers play a crucial role in ensuring that the organization achieves its revenue targets. Managers in revenue centers focus on increasing sales levels and are often measured based on their ability to enhance the organization's revenue levels.

Behavior in revenue centers is directed towards aggressive sales targets and expansion of market footprint. Employees are usually motivated to develop marketing innovations, secure new business, and nurture existing customer relationships to drive revenue growth.
  • Emphasis on boosting sales
  • Market expansion efforts
  • Enhancing customer relations
This environment fosters creativity and determination as employees strive to exceed revenue goals.
Profit Centers
In profit centers, departments or divisions are responsible for both revenue generation and cost management, with the ultimate aim of maximizing profits. This comprehensive responsibility requires managers to find an optimal balance between increasing sales and controlling costs effectively.

The behavior in profit centers is marked by a strategic blend of cost efficiency and sales growth. Employees in these centers are constantly evaluating processes to identify ways to enhance profitability without incurring unnecessary costs.
  • Strategic cost management
  • Sales growth focus
  • Blend of cost and revenue responsibilities
As a result, the profit center environment fosters a holistic business perspective, encouraging employees to think critically about both cost and revenue dimensions.
Investment Centers
Investment centers are tasked with managing capital investments and assets, aiming to achieve a company's long-term financial goals. Here, managers are responsible for making sure that the capital investments generate attractive returns and that resources are allocated effectively.

The behavior in investment centers revolves around detailed analysis and evaluation of investment opportunities. Employees need to be adept at assessing potential returns and managing risks related to investments.
  • Focus on long-term profitability
  • Effective resource allocation
  • Thorough investment analysis
This mindset supports a culture of innovation and calculated risk-taking, with an emphasis on pursuing opportunities that will enhance the company's financial standing.
Managerial Behavior
Managerial behavior within different responsibility centers is shaped significantly by the type of performance measures and priorities set forth by the organization. In cost centers, managers lean heavily on ensuring operational efficiency and cost savings. Revenue centers drive a behavior focused on sales and attracting new business.

For profit centers, managers cultivate a balanced approach toward both revenue and costs, while in investment centers, the focus shifts to capital allocation and investment returns. This naturally causes managers to tailor their strategies and motivations to meet the specific goals of their center.
  • Influenced by center type
  • Tailored behavior to priorities
  • Alignment with performance goals
Ultimately, the managerial behavior is a direct reflection of the responsibilities and goals unique to each type of responsibility center, ensuring alignment with the organization's overarching objectives.

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Most popular questions from this chapter

Cash budgeting, budgeted balance sheet (Continuation of 6 -42) (Appendix) Refer to the information in Problem \(6-42\) Budgeted balances at January 31,2018 are as follows: Customer invoices are payable within 30 days. From past experience, Skulas's accountant projects \(40 \%\) of invoices will be collected in the month invoiced, and \(60 \%\) will be collected in the following month. Accounts payable relates only to the purchase of direct materials. Direct materials are purchased on credit with \(50 \%\) of direct materials purchases paid during the month of the purchase, and \(50 \%\) paid in the month following purchase. Fixed manufacturing overhead costs include \( 64,000\) of depreciation costs and fixed nonmanufacturing overhead costs include \( 10,000\) of depreciation costs. Direct manufacturing labor and the remaining manufacturing and nonmanufacturing overhead costs are paid monthly. All property, plant, and equipment acquired during January 2018 were purchased on credit and did not entail any outflow of cash. There were no borrowings or repayments with respect to long-term liabilities in January 2018 On December \(15,2017,\) Skulas's board of directors voted to pay a \( 160,000\) dividend to stockholders on January 31,2018 1\. Prepare a cash budget for January \(2018 .\) Show supporting schedules for the calculation of collection of receivables and payments of accounts payable, and for disbursements for fixed manufacturing and nonmanufacturing overhead. 2\. Skulas is interested in maintaining a minimum cash balance of \( 120,000\) at the end of each month. Will Skulas be in a position to pay the \( 160,000\) dividend on January \(31 ?\) 3\. Why do Skulas's managers prepare a cash budget in addition to the revenue, expenses, and operating income budget? 4\. Prepare a budgeted balance sheet for January 31,2018 by calculating the January 31,2018 balances in (a) cash (b) accounts receivable (c) inventory (d) accounts payable and (e) plugging in the balance for stockholders' equity.

Budgeting; direct material usage, manufacturing cost, and gross margin. Xander Manufacturing Company manufactures blue rugs, using wool and dye as direct materials. One rug is budgeted to use 36 skeins of wool at a cost of \( 2\) per skein and 0.8 gallons of dye at a cost of \(6\) per gallon. All other materials are indirect. At the beginning of the year Xander has an inventory of 458,000 skeins of wool at a cost of \(961,800\) and 4,000 gallons of dye at a cost of \(23,680 .\) Target ending inventory of wool and dye is zero. Xander uses the FIF0 inventory cost-flow method. Xander blue rugs are very popular and demand is high, but because of capacity constraints the firm will produce only 200,000 blue rugs per year. The budgeted selling price is \(2,000\) each. There are no rugs in beginning inventory. Target ending inventory of rugs is also zero. Xander makes rugs by hand, but uses a machine to dye the wool. Thus, overhead costs are accumulated in two cost pools- one for weaving and the other for dyeing. Weaving overhead is allocated to products based on direct manufacturing labor-hours (DMLH). Dyeing overhead is allocated to products based on machine-hours (MH). There is no direct manufacturing labor cost for dyeing. Xander budgets 62 direct manufacturing laborhours to weave a rug at a budgeted rate of \(13\) per hour. It budgets 0.2 machine-hours to dye each skein in the dyeing process. 1\. Prepare a direct materials usage budget in both units and dollars. 2\. Calculate the budgeted overhead allocation rates for weaving and dyeing. 3\. Calculate the budgeted unit cost of a blue rug for the year. 4\. Prepare a revenues budget for blue rugs for the year, assuming Xander sells (a) 200,000 or (b) 185,000 blue rugs (that is, at two different sales levels). 5\. Calculate the budgeted cost of goods sold for blue rugs under each sales assumption. 6\. Find the budgeted gross margin for blue rugs under each sales assumption. 7\. What actions might you take as a manager to improve profitability if sales drop to 185,000 blue rugs? 8\. How might top management at Xander use the budget developed in requirements \(1-6\) to better manage the company?

Revenues, production, and purchases budgets. The Yucatan Co. in Mexico has a division that manufactures bicycles. Its budgeted sales for Model \(\mathrm{XG}\) in 2018 are 95,000 units. Yucatan's target ending inventory is 7,000 units, and its beginning inventory is 11,000 units. The company's budgeted selling price to its distributors and dealers is 3,500 pesos per bicycle. Yucatan buys all its wheels from an outside supplier. No defective wheels are accepted. Yucatan's needs for extra wheels for replacement parts are ordered by a separate division of the company. The company's target ending inventory is 14,000 wheels, and its beginning inventory is 16,000 wheels. The budgeted purchase price is 400 pesos per wheel. 1\. Compute the budgeted revenues in pesos. 2\. Compute the number of bicycles that Yucatan should produce. 3\. Compute the budgeted purchases of wheels in units and in pesos. 4\. What actions can Yucatan's managers take to reduce budgeted purchasing costs of wheels assuming the same budgeted sales for Model XG?

Sales and production budget. The Coby Company expects sales in 2018 of 201,000 units of serving trays. Coby's beginning inventory for 2018 is 13,000 trays, and its target ending inventory is 29,000 trays. Compute the number of trays budgeted for production in 2018 .

Production budget. Superior Industries sales budget shows quarterly sales for the next year as follows: Quarter \(1-10,000 ;\) Quarter \(2-8,000 ;\) Quarter \(3-12,000 ;\) Quarter \(4-14,000\). Company policy is to have a target finished- goods inventory at the end of each quarter equal to \(20 \%\) of the next quarter's sales. Budgeted production for the second quarter of next year would be: 1\. 7,200 units; 2.8,800 units; 3.12,000 units; 4.10,400 units
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