Responsibility centers are essential for the management of an organization. A responsibility center is an operational unit or a part of the organization that fulfills the tasks within the given unit. A manager is responsible for a responsibility center and works to ensure that the responsibilities are fulfilled according to the unit’s structure. Different organizations have responsibility centers, and they use them to attain some goals and segment work (Responsibility Centre definition-AccountingTools, 2023). The said centers have goals, policies, objectives, financial reports, and procedures that outline their way of operations. There are four main types of responsibility centers: cost, revenue, profit, and investment. The use of them can benefit organizations, including those that provide human services like the Red Cross.
Types of Responsibility Centers and their Benefits
Cost Center
A cost center is essential for handling all issues related to the cost issues of the organization. Therefore, it supervises, allocates, eliminates, and segregates all costs of the organization. Its primary role is overseeing the organization’s costs, eliminating unnecessary budget costs, and ensuring that the company only executes the necessary expenditure measures (Responsibility Centre definition-AccountingTools, 2023). In other words, the center is beneficial since it helps handle the increment and management of the costs related to the company operations (Vaidya, n.d.). An organization can have different cost centers that touch on administrative, support, and service roles, which are necessary for smooth company operation and, therefore, cannot be eliminated.
Revenue Center
The revenue center handles the responsibility of monitoring and initiating revenue. It is a center that follows up on the budgeted revenue, marketing expenditures, and the actual revenue and compares them to understand the revenue generated and whether the company is making any progress (Responsibility Center definition-AccountingTools, 2023). The revenue center’s primary function is generating sales. It is judged according to the number of sales made and not the amount incurred, which is essential for outlining a human service organization’s revenue organization in a given period (Vaidya, n.d.). The center has managers responsible for generating revenue by setting targets and taking measures to achieve them; they work on maximizing the market share and minimizing expenses. Revenue centers are more pronounced and functional in sales-focused companies. It is essential for selling products and services from other internal units. It makes the decisions on the size of the marketing plan and strategy and sets the negotiation terms, payment plans, and delivery agendas for the products and services.
Profit Center
The profit center calculates the profits of the organization. An organization can have different profit centers with different managers who calculate the profit by comparing the expenses and the income (Responsibility center definition — AccountingTools, 2023). The profit center is keen on the goods and services being sold and their cost of production. The managers in this segment handle the increment of revenues and management of costs, which means the manager must monitor the segmental revenues and the related expenses. In the center, the manager controls the selling price and sales volume of the products and services and maintains the authority of all measured items (9.4 responsibility centers | Managerial accounting, n.d.). The managers at the profit center have all the necessary data to evaluate performance based on revenues and outline the acquisition cost and the business’s value within a given period.
Expense Center
The center handles investment and revenue by having an investment manager. The manager oversees the fund invested, the income, and expenses and forms a credit policy that impacts debt collection (Vaidya, n.d.). Examples of expense centers include the accounting department, which incurs expenses without producing direct revenue. In human service organizations, expense centers are responsible for outlining the efforts exerted to produce the services.
Application of Cost Center in Disaster Relief Program
Cost center as a responsibility center can be applied to the Disaster Relief Program in the Red Cross. The program is keen on the number of disasters that happen in a year and the nature of their occurrence (Disaster Relief, n.d.). Understanding the disaster and the needs of the affected population is vital for outlining a plan to support the community. The responsibility center of the cost center is used in the program to outline the cost of anticipating and responding to a disaster. The manager of the cost center in the Red Cross must follow the budget and ensure that all areas are included and the indicated expenditures are necessary and match (9.4 responsibility centers | Managerial accounting, n.d.). Calculating the cost ensures that our areas are covered and that the Disaster Relief Program has enough resources to respond to tragedies and save lives effectively.
Conclusion
Responsibility centers are segments with different goals and objectives but retain an interconnected function that works for the organization’s well-being. The four responsibility centers focus on the organization’s cost, revenue, expenses, and profit and are linked to the budget, costs, prices, and earnings from goods and services. Therefore, in most organizations, including the Red Cross, that provide human services, responsibility centers are necessary and used to provide different responsibilities related to the organization’s financial activities.
References
9.4 responsibility centers | Managerial accounting. (n.d.). Lumen Learning – Simple Book Production. https://courses.lumenlearning.com/suny-managacct/chapter/responsibility-accounting-in-business-environments/
Disaster relief. (n.d.). American Red Cross | Help Those Affected by Disasters. https://www.redcross.org/about-us/our-work/disaster-relief.html
Responsibility center definition — AccountingTools. (2023, December 4). AccountingTools. https://www.accountingtools.com/articles/what-is-a-responsibility-center.html
Vaidya, D. (n.d.). Responsibility Center. Wall Street Mojo. https://www.wallstreetmojo.com/responsibility-center/
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