Question

Depending on the level of organization (cost center vs profit center vs investment center), the idea of responsibility accounting defines the techniques used to evaluate the performance of individuals and managers. If you’ve been involved in an organization using performance evaluation techniques, please discuss the system in terms of its design, implementation, and overall effectiveness. Did it provide useful information on performance as well as motivate those subject to the system. What were its strengths and weaknesses, and given all we’ve been studying about planning and control, what changes would you make to the system if you were able?

Answer 1

What is Profit center :

These are the center of organisation who have control over both cost and revenue . These centers contribute to the profits of organisation directly and the performance of these centers are evaluated not only the basis of cost incurred by them but the overall profitability generated by them. These centers have both external and internal influence.

Performance evaluation : Some of the tools for performance evaluation are given below :

1.Ratio of expenses and sales

2.Net profit and Gross Profit Ratio

3.Comparison between budget and actual Profit.

What is Cost Center :

These center are those centers which uses resources to operate and do not contribute directly to the revenue of the organisation. These centers have generally internal influence only. These are generally research and development department, Human resource department , customer service and marketing and branding department of the company. These cost centers are important to organisation as these supports the profit centers to earn like a enabler.

Organisation need to find out unwanted costs and need to reduce them .

Tools for performance evaluation are basically the variance analysis which shows how the standard and actual cost differs . It could be in terms of Price variance or quantity variance.

What is Investment Center :

The higher level management authority are held responsible for the return generated from the capital employed by them. This is one of the major underlying for the frauds which we seen in our past . The the managerial variable remuneration is mainly dependent on the return generated by them.

Tools for performance evaluation mainly involve the calculation of Return on Investment (ROI) and other modified formulas for calculating return on investment like Dupont Return on Investment which is

ROI = (Operating Income/ Sales) X (Sales/Average Assets).

Analysis of system on the basis of it's design, Implementation and overall effectiveness :

	Profit center	Cost center	Investment center
Design	Designed to act as a fuel for the organisation. Source of revenue	To act as a support for the profit center and indirectly contribute to the revenue of organisation.	To Evaluate the return for the fund deployed by the company. More of a responsibility and accountability center.
Implementation	Involves both external and internal factors to implement. Thus participation of all is required.	Involves only internal factors to implement. Participation of only Internal department is required.	Involves both external and internal factors to implement.Thus participation of all is required.
Overall effectiveness	Effectiveness measured using tools and focused on high net profit and gross profits in financial statement.	Effectiveness measured using tools focused on reducing unnecessary costs and variance analysis.	Effectiveness measured by the percentage of return generated on the amount of capital used. Tools like ROI helps to effectively evaluate the performance.

Yes, these system do provide the useful information and with the help of tools management and other employees are able to find out the ways to improve in future. Through these performance analysis tools management can motivate employees to achieve required targets. The improvement never can occurs if the evaluation of performance is not there. Thus the performance evaluation tools are very important to improve or motivate the employees and management staff to work well.

Strength and weakness of these systems:

Strengths:

1.Motivates employees and staff to achieve targets.

2.Management can change the focus areas as per requirement like whether the cost centers need to increase cost to increase the revenue of Profit centers manifold times.

Weakness :

The main weakness of these systems are related to confusion in the activities and sometime the management takes decision without evaluating the possible other impacts. So the main objective and goal of organisation somehow lost .

Scope of Changes :

There should be proper implementation of "responsibility centers" also which shows the management responsibility and accountability and leads to no confusion . Also there should be introduction of some system which join these profit center, Cost center and Investment center with each other and using responsibility center the tasks should be assigned. This will lead to proper planning and Control over these centers and the accountability will also be dealt properly to accomplish the overall goals and objectives of organisation.