Has control over revenue generation but has no control over costs and investment?

Financial control is vitally important to any well-run business. Financial control mechanisms ensure that the organization continues to progress toward achievement of its financial objectives. Effective financial control allows the organization to detect problems at the earliest possible stage.

Use of responsibility centers is one of the most established and widely used techniques in financial control. An understanding of responsibility centers and, its corollary, responsibility accounting is beneficial for all physicians who have a stake in the financial management of a practice.

Responsibility accounting breaks a large organization into smaller, more easily manageable units known as responsibility centers. Each unit is looked upon as a small business. Managers bear an element of responsibility for the performance of their respective centers.

Responsibility accounting represents decentralization of a business enterprise. It is comparable to a political policy of shifting power from the federal government to state or even municipal government.

Responsibility centers Various bases may be used to designate responsibility centers. In manufacturing, geographic regions, individual products, and customer groups are frequently used as the means for defining responsibility centers. In the context of a medical practice, comparable categories might be satellite offices, types of procedures (such as cataract, refractive), or categories of patients (such as pediatric, seniors).

Management of responsibility centers requires generation of segment reports. Each segment report reflects the performance of a particular responsibility center. One type of segment report is a segment income statement. A segment income statement will show revenues, expenses, and profit for the chosen segment. Also useful is the segment contribution margin statement. Thiswill show the level at which a particular segment contributes to defray fixed costs. It will demonstrate which segments are subsidizing other segments.

There are several advantages inherent in the use of responsibility centers and responsibility accounting. A responsibility center approach helps make a large, diversified organization manageable. Appropriate control of an entity with several varied components may be otherwise impossible due to the vast number of interactions that would have to be taken into consideration. Also, the responsibility center method drives decision-making down to the level of the respective centers. This supports the concept that decisions should be made as close to the source of the data as possible.

Enhanced job satisfaction Job satisfaction and motivation may be enhanced with responsibility accounting since each center controls its fate to a certain degree. Frustration with the "system" or the "upstairs office" is thus minimized.

Success with this approach requires coordination of the efforts of the various responsibility centers. The smaller units must be guided to share the goals of the larger organization, lest the entire entity collapse.

The center manager has control over revenues, but not costs or the level of investment, in a revenue center. A revenue center in a multi-office practice might be the department responsible for third-party contracting.

Costs and revenues (hence profit), but not the level of investment, are under control of the manager in a profit center. The collections department could be considered a profit center in a multi-office practice.

Finally, an investment center is one in which the manager controls costs, revenue, and the level of investment. Level of investment represents expenditure on space, equipment, and other capital resources. In a multi-office practice, a freestanding surgery unit would represent an investment center.

What is a Responsibility Center?

A responsibility center is a functional entity within a business that has its own goals and objectives, dedicated staff, policies and procedures, and financial reports. It is used to give managers specific responsibility for revenues generated, expenses incurred, and/or funds invested. This allows the senior managers of a company to trace all financial activities and results of a business back to specific employees. Doing so preserves accountability, and may also be used to calculate bonus payments for employees.

There may be many responsibility centers in a business, but never less than one such center. Thus, a responsibility center is usually a subset of a business. These centers are usually stated on a firm’s organization chart.

From an accounting perspective, a financial report should be issued to each responsibility center that itemizes the revenues, expenses, profits, and/or return on investment for which the manager of each center is solely responsible. This can result in quite a large number of customized reports being issued on an ongoing basis.

The use of multiple responsibility centers requires a certain amount of corporate infrastructure to develop each center, track its results, and manage expectations with the various managers.

Types of Responsibility Centers

A responsibility center may be one of four types, which are noted below.

Revenue Center

A revenue center is solely responsible for generating sales. A typical revenue center is the sales department.

Cost Center

A cost center is solely responsible for the incurrence of certain costs. A typical cost center is the janitorial department.

Profit Center

A profit center is responsible for both revenues and expenses, which result in profits and losses. A typical profit center is a product line, for which a product manager is responsible.

Investment Center

An investment center is responsible not only for profits, but also for the return on funds invested in the group's operations. A typical investment center is a subsidiary entity, for which the subsidiary's president is responsible.

Has control over cost revenue and investment?

What are the 4 types of responsibility centers?

Who is responsible for both cost and revenue?

Which of the following is the responsibility center where managers have control over costs and revenues but not investment in operating assets?