It has been said that divisionalisation and decentralisation are sometimes regarded as synonymous but that in fact divisionalisation adds a new dimension by introducing performance responsibility to divisional management.
Fulfillment of that responsibility can only be encouraged, rewarded and tempered if performance is measured and monitored on a sound, accepted and comparable basis.
‘Responsibility centres’ provide the basis for one such approach. A responsibility centre has been defined by the Chartered Institute of Management Accountants as ‘a segment of the organisation where an individual manager is held responsible for the segment’s performance’.
There are three types of ‘responsibility centre’ – expense centres, profit centres, and investment centres:
- An expense centre is ‘a location, function or items or equipment in respect of which controls may be ascertained and related to cost units for control purposes’
- A profit centre is ‘a segment of the business entity by which both revenues are received and expenditures are caused or controlled. Such revenues and expenditure being used to evaluate segmental performance’.
- An investment centre is ‘a profit centre in which inputs are measured in terms of expenses and outputs are measured in terms of revenues, and in which assets employed are also measured, the excess of revenues over expenditure then being employed’.
Together they form the basis for ‘responsibility accounting’, a system of accounting, ‘that segregates revenues and costs into areas of personal responsibility in order to assess performance attained by persons to whom authority has been assigned’.
Profit responsibility performance can be reflected in figures relating profit to turnover. However, performance may be subject to the fairness of apportioned costs and transfer prices.
Investment responsibility performance can be judged on the basis of return on investment or residual income (excess earnings over the cost of capital). In each case the assets/capital included should be that over which the responsible management has control. It is also clear that assets must be valued on a consistent basis so that like for like comparisons can be made between different investment responsibility centres.