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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

Expert verified
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

Sales budget, service setting. In 2017 , Hart \(\&\) Sons, a small environmental-testing firm, performed 11,400 radon tests for \(260\) each and 15,000 lead tests for \(210\) each. Because newer homes are being built with lead-free pipes, lead-testing volume is expected to decrease by \(12 \%\) next year. However, awareness of radon-related health hazards is expected to result in a \(5 \%\) increase in radon-test volume each year in the near future. Jim Hart feels that if he lowers his price for lead testing to \(200\) per test, he will have to face only a \(4 \%\) decline in lead-test sales in 2018 . 1\. Prepare a 2018 sales budget for Hart \(\&\) Sons assuming that Hart holds prices at 2017 levels. 2\. Prepare a 2018 sales budget for Hart \(\&\) Sons assuming that Hart lowers the price of a lead test to \( 200\). Should Hart lower the price of a lead test in 2018 if the company's goal is to maximize sales revenue?

Responsibility in a restaurant. Paula Beane owns a restaurant franchise that is part of a chain of "southern homestyle" restaurants. One of the chain's popular breakfast items is biscuits and gravy. Central Warehouse makes and freezes the biscuit dough, which it then sells to the franchise stores where it is thawed and baked in the individual stores by the cook. Each franchise also has a purchasing agent who orders the biscuits (and other items) based on expected demand. In March 2018 , one of the freezers in Central Warehouse breaks down and biscuit production is reduced by \(25 \%\) for 3 days. During those 3 days, Paula's franchise runs out of biscuits but demand does not slow down. Paula's franchise cook, Betty Baker, sends one of the kitchen helpers to the local grocery store to buy refrigerated ready-to-bake biscuits. Although the customers are kept happy, the refrigerated biscuits cost Paula's franchise three times the cost of the Central Warehouse frozen biscuits, and the franchise loses money on this item for those 3 days. Paula is angry with the purchasing agent for not ordering enough biscuits to avoid running out of stock and with Betty for spending too much money on the replacement biscuits. Who is responsible for the cost of the biscuits? At what level is the cost controllable? Do you agree that Paula should be angry with the purchasing agent? With Betty? Why or why not?

Responsibility centers. Elmhurst Corporation is considering changes to its responsibility accounting system. Which of the following statements is/are correct for a responsibility accounting system. i. In a cost center, managers are responsible for controlling costs but not revenue. ii. The idea behind responsibility accounting is that a manager should be held responsible for those items that the manager can control to a significant extent. iii. To be effective, a good responsibility accounting system must help managers to plan and to control. iv. costs that are allocated to a responsibility center are normally controllable by the responsibility center manager. 1\. I and Il only are correct. 2\. II and III only are correct. 3\. \(I, \|,\) and \|\| are correct. 4\. \(I, \|\) and \(I V\) are correct

Cash budget (continuation of \(6-40\) ). Refer to the information in Problem \(6-40\) Assume the following: Animal Gear (AG) does not make any sales on credit. AG sells only to the public and accepts cash and credit cards; \(90 \%\) of its sales are to customers using credit cards, for which AG gets the cash right away, less a \(2 \%\) transaction fee. Purchases of materials are on account. AG pays for half the purchases in the period of the purchase and the other half in the following period. At the end of March, AG owes suppliers \( 8,000\). AG plans to replace a machine in April at a net cash cost of \( 13,000\). Labor, other manufacturing costs, and nonmanufacturing costs are paid in cash in the month incurred except of course depreciation, which is not a cash flow. Depreciation is \( 25,000\) of the manufacturing cost and \( 10,000\) of the nonmanufacturing cost for April. AG currently has a \( 2,000\) loan at an annual interest rate of \(12 \%\). The interest is paid at the end of each month. If AG has more than \( 7,000\) cash at the end of April it will pay back the loan. AG owes \( 5,000\) in income taxes that need to be remitted in April. AG has cash of \( 5,900\) on hand at the end of March. 1\. Prepare a cash budget for April for Animal Gear. 2\. Why do Animal Gear's managers prepare a cash budget in addition to the revenue, expenses, and operating income budget?

Budgeted costs, Kaizen improvements environmental costs. US Apparel (USA) manufactures plain white and solid-colored T-shirts. Budgeted inputs include the following: USA has the opportunity to switch from using the dye it currently uses to using an environmentally friendly dye that costs \( 1.25\) per ounce. The company would still need 4 ounces of dye per shirt. USA is reluctant to change because of the increase in costs (and decrease in profit), but the Environmental Protection Agency has threatened to fine the company \(130,000\) if it continues to use the harmful but less expensive dye. 1\. Given the preceding information, would USA be better off financially by switching to the environmentally friendly dye? (Assume all other costs would remain the same.) 2\. Assume USA chooses to be environmentally responsible regardless of cost, and it switches to the new dye. The production manager suggests trying Kaizen costing. If USA can reduce fabric and labor costs each by \(1 \%\) per month on all the shirts it manufactures, by how much will overall costs decrease at the end of 12 months? (Round to the nearest dollar for calculating cost reductions.) 3\. Refer to requirement 2. How could the reduction in material and labor costs be accomplished? Are there any problems with this plan?
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