• exists to accomplish one or more purposes (objectives)
• senior management decides on set of strategies to accomplish goals
• objectives of responsibility centers help implement strategies
• receive inputs (material, labor, services) and use working capital (inventory, receivables) to perform its particular function ultimately turning inputs into outputs (tangible or intangible)
• production plant - goods, staff units- services
• products may be sent to another responsibility center outside marketplace
• revenues are amounts earned from providing outputs

• Mangement is responsible for ensuring the optimum relationship between inputs and outputs
• in a causal and direct relationship, control is focused on the minimum input necessary to produce the required output according to the correct specifications and quality standards
• in a non-direct relationship, it's hard to determine the minimum input (R&D budgets, ad expenses, etc)

• most inputs are physical measurements (hours of labor, quarts of oil, etc)
• amounst are translated into money allowing hte value of resources to be compared
• multiply a physical quantity by price per unit to get the "cost" (monetary measure of the amount of resources used in a responsibility center)
• inputs are resources used by a responsibility center
• easier to measure costs of inputs than calculate values of outputs

• uses fewer resources than another responsibility center but produces the same output
• uses same amount of resources, but produces more output

measured by comparing actual costs with some standard of what those costs should have been at measured output

• recorded costs are not precise measures of the resource actually consumed
• standard is merely an approximation of what ideally should have happened under the prevailing circumstances

determined by the relationship between a responsibility center's output and its objectives

more output contributes to objectives, the more effective the unit

• major objective is to earn a satisfactory profit which is a measure of effectiveness

• revenue centers - output measured in monetary terms
• expense centers - inputs measured
• profit centers - both outputs (revenues) and inputs (expenses)
• investment centers - relationship between profit and investment

• output (revenue) is measured in monetary terms, but no formal attempt is made to relate input to output.
• typically these centers are marketing / sales units that don't have authority to set selling prices and aren't charged for the goods they market

• inputs are measured in monetary terms, but outputs aren't
• Two types: engineered costs and discretionary costs

"right" amount can be estimated wtih reasonable reliability (factory costs for direct labor)

• inputs measured in monetary terms
• output measured in physical terms
• optimum dollar of input required to produce one unit of output can be determined

• input measured in monetary terms
• output measured in physical terms
• optimum dollar of input required to produce one unit of output can be determined
• Ex. direct labor and direct material
• usually found in manufacturing operations
• output multiplied by standard cost of each unit measured should have cost (difference represents efficiency)

• includes administrative and support units
• output is not measured in monetary terms
• discretionary reflects management's decisions regarding certain policies
• difference between budgets and actual expenses is not a measure of efficiency; difference between budgeted input and actual input and doesn't incorporate the value of the output

• differs for discretionary v. engineered
• engineered: decides whether proposed budget represents unit cost of performing the task efficiently
• discretionary: management fomulates the budget by determining the magnitude of the job that needs to be done

• continuing - done consistently from year to year (preparing financial statements)
• special - one shot project (developing a profit-budgeting system)

• discretionary expense center's current level of expenses is taken as a starting point
• adjusted for inflation, anticipated changes, special jobs, and cost of comparable jobs

• current level of expenditures are accepted and not reexamined during the budget preparation process (assume last year's expenditures are justified)
• managers of these centers typically want to increase level of services and tend to request additional resources which are usually provided if they make a strong case (Parkinson's second law: overhead costs tend to increase, period)

• Through analysis of each discretionary expense center on a rolling schedule, so that all are reviewed at least once every five years or so
• intensive review attempts to ascertain from scratch ("de novo") the resources actually required to carry out each activity within the expense center
• establishes another new base for which the annual budget attempts to keep costs in line with this base until the next review

• should hte function under review be performed at all?
• what should the quality level be?
• are we doing too much?
• should hte function be performed in this way?
• how much should it cost

• time-consuming and likely to be traumatic for managers whose operations are being reviewed
• zero-based budgeting was thrown out because they wanted to do it once a year
• zero-based reviews happen once every five years
• 1980's and 1990's were usually a reaction to a downturn in profitability: downsizing, rightsizing, restructuring and process reengineering

• costs in discretionary expense centers are insulated from short-term fluctuations
• difference stems from the fact that in preparing budgets management tends to approve changes that correspond to anticipated changes in sales volume
• personnel and personnel related costs are the largest expense and they tend to be a constant percentage of budgeted sales volume

• in engineered, the objective is to become cost competitive by setting a standard and measuring actual cost against the standard
• main purpose of discretionary cost is to control costs by allowing a manaager to participate in the planning, sharing in the discussion of what tasks should be undertaken and what level of effort is appropriate for each (before costs are incurred)

• primary job is to obtain the desired output
• spending an amount that is "on budget" is considered satisfactory; spending more is a cause for concern, and spending less could mean that planned work isn't being done
• financial performance report is not a means of evaluating the efficiency of a manager
• control over spending is exercised by requiring superior's approval before the budget is overrun
• total control over discretionary expenses is achieved through non financial performance measures (opinions)

• Difficulty in measuring output
• Lack of goal congruence

• functions can be hard to quantify or evaluate (advice / service)
• can't set cost standards against which to measure financial performance

• if a staff office wants to develop the "ideal" system, it may be too costly relative to the additional profits that perfection could generate
• severety of problems (difficulty / goal congruence) is directly related to the size and prosperity of the company
• support centers of ten charge responsibility centers for the services they provide

• proposed budget usually consists of a list of expense items with the proposed budget being compared with the current year's actual expenses
• some companies want a more elaborate presentation to include - basic costs of the center, discretionary activities of the center, explanation of all proposed increases in the budget other than inflation

• Difficulty relating Results to inputs
• Lack of goal Congruence

• difficult to measure results quantitatively in R&D
• usually has a semitangible output in the form of patents, new products or processes, but relationship of output to input is difficult to appraise on an annual basis because the completed product may have taken several years of effort

• research manager wants to build the best research organization money can buy, even though it may be more expensive than the company can afford
• research people often don't have sufficient knoledge or interest in the business to determine the optimum direction of the research efforts

• unplanned with management at best specifying the general area to be explored
• often a significant time lapse between initiation of research and the introduction of a successful new product

• no scientific way of determining the optimum size of an R&D budget
• many companies use a percentage of average revenues as a base which is applied to determine in part with competitor's R&D expenditures and in part with the company's own spending history
• consists of a list of programs plus a blanket allowance for unplanned work; it is usually reviewed annually by senior management

• if a company has decided on a long-range R&D program and implemented this program with approval, the preparation of annual budgets is simple, involving the calendarizaton of the expected expenses for the budget period
• if budget is in line with strategic plan, then budget is approved

• most companies compare actual expenses with budgeted expenses at regular intervals (monthly, quarterly)
• summarized for managers at progressively higher levels to assist in planning expenses and assure that the expenses remain at approved levels

• latest forecast of total costs with the approved amount for each project
• comparison between budgeted expenses and actual expenses

• order filling (logistics)
• generation of revenue
• order getting (true marketing)

• Administrative & Support Centers - least difficult
• R&D - most difficult
• Marketing (true) - in between