Responsibility centers

Responsibility accounting rests on a simple principle: evaluate managers only on results they can actually control. A responsibility center is the unit that principle is applied to — a department, division, plant, or product line whose manager is answerable for specific costs, revenues, or returns.

The four types differ by how much of the profit equation the manager controls. A cost center manager controls costs but not revenue — a maintenance department or accounting function, measured against budgeted spending and cost variances. A revenue center manager controls sales but not the costs of producing what is sold, and is judged on sales volume against quota. A profit center manager controls both revenues and costs, so the measure is segment profit. An investment center manager also controls the assets employed, and is therefore evaluated on returns relative to that investment using measures such as return on investment (ROI) or residual income.

Choosing the right center type matters because the measure drives behavior. Evaluating a plant manager as a profit center when they have no influence over selling prices produces meaningless variances and misplaced blame. Investment center measures introduce their own tension: ROI can discourage a manager from accepting a project that earns above the company's cost of capital but below the division's current ROI, which is why residual income and economic value added are often used alongside it.

CMA Part 1 covers responsibility centers in the performance management section, pairing them with segment reporting, transfer pricing, and variance analysis. Expect questions that give you a scenario and ask which center type applies, or that ask which performance measure is appropriate for a given level of managerial control.