AUTONOMY AND

RESPONSIBILITY
 

 OVERVIEW OF
 AUTONOMY &

RESPONSIBILTY
DIVISIONAL AUTONOMY
ØManagement Style & Process
ØResponsibility Structure
ØMeasurement of Reward Systems
RESPONSIBILITY STRUCTURE
ØEfficiency Measure
ØProcess Measure
ØEffectiveness Measure

RESPONSIBILTY CENTERS
ØNature of Responsibility Centers
ØTypes of Responsibility Centers
a)Revenue Centers
b)Expense Centers
c)Market Centers
d)Profit Centers
i. Marketing
ii.Manufacturing
iii.Measuring Profitability
PERFORMANCE MEASUREMENT
OF DECENTRALISED
OPERATIONS
ØMeasuring Divisional Operations

INTER PROFIT CENTER
RELATIONS
ØSetting Transfer Prices
 MEANING OF AUTONOMY
AND ITS NEED



AUTONOMY CAN BE CATEGORISED
INTO THREE DIVISIONS :
Management style and process

Responsibility structure


Reward system
 MANAGEMENT STYLE AND
PROCESS
Decision of managing business in a
centralised manner or by striking a balance
between centralised control and
decentralised action
The variables that influence the level of
autonomy are as follows:
ØInvolvement
ØInteraction
ØTrust and Confidence
 MANAGEMENT STYLE AND

PROCESS
Management polices and procedure


Diversification strategy


Business strategy
 RESPONSIBILITY STRUCTURE
It represents physical human and financial
resources entrusted to profit centre manager
It is considered as the second line of
influence that top management has over
profit centre managers
It is divided into two parts namely:
ØResponsibility Centers
ØPerformance Measurements Systems

 RESPONSIBILITY STRUCTURE
The measurement of performance of
responsibility centre is done through cost,
profit, revenue, investment etc.
Different methods of measuring
responsibility centre are :
ØEfficiency Measure
ØProcess Measure
ØEffectiveness Measure
 MEASUREMENT AND REWARD
SYSTEMS
The methods of measurement are :
ØProration
ØNegotiation
ØMetering
Reward systems are of two types:
ØTangible rewards
ØIntangible rewards
 OVERALL EFFECTIVENESS
MEASURES: RETURN ON


INVESTMENTS(ROI)
It is the most important component for any
business for accounting its profitability.
ROI can be divided into two components:
ØNet Profit
ØTurnover On Investments


 ROI = NETPROFIT/INVESTED CAPITAL


RESPONSIBILITY CENTRES
 UNDERSTANDING
‘RESPONSIBILITY CENTERS'
• It is a unit of an organization headed by a manager
directly responsible for its performance.
• It can be assigned narrowly or broadly in terms of
the activities assigned.
• Type of responsibility centre is defined when the
decision regarding primary objective is taken
• For example, as a cost centre, a manager would
focus only on reducing the cost .
 NATURE OF RESPONSIBILITY
CENTERS
 It helps in implementing the strategies.
 Ability of its responsibility centers to meet their
objectives help organization to achieve their goals.
 The inputs of responsibility centers are called as
‘Costs’.
 Performance of responsibility centre can be
measured by :
ØEffectiveness Criteria: It is decided on the basis of
unit’s output and the accomplishment of
organizational objectives.
ØEfficiency Criteria : It is the ratio of outputs
and inputs
 REVENUE CENTERS
 Organizational units in which outputs are measured
in monetary terms.
 Also called expense centers
 Not directly responsible for profits
 Main objective is to maximize revenues




EXPENSE CENTERS


 Only input and expenses are measured in

monetary terms.
 There are two types of expense centers: -
ØEngineered expense centers
ØDiscretionary expense centers
 CONTROL CHARACTERISTICS

FOR EXPENSE CENTERS
The management control systems for expense centers
include: -
 Budget preparation – decisions regarding budget for expenses
for a discretionary expense center are different from that of an
engineered expense center.
 Cost variability – costs in both the expense centers vary
 Financial control
 Measurement of performance – the performance reports for
both the expense must be distinguished clearly.



 ADMINISTRATIVE AND
SUPPORT CENTER
Administrative centers include the senior corporate
management, the business unit management and
the managers responsible for their staff units.

Support centers provide services to other
responsibility centers.

BUDGET PREPARATION

 RESEARCH AND
DEVELOP CENTER

Control problems in research and development
center

ØDifficulty in measuring quality
ØLack of goal congruence

 MARKETING CENTRE
 Order filling(Logistics): It includes
transfer of goods from company to
customer, and receiving payments from
customers
 Order getting
ØRelated to marketing
ØIncludes test marketing, training sales force,
advertising, asles promotion etc.

 PROFIT CENTRES
 When financial performance of a responsibility
centre is measured in terms of profit it is called
Profit Centre
 Performance measured in terms of numerical
difference (Revenue-Expenditures)
 Responsibility of a profit centre is to earn profits
 Determines the efficiency of the manager in
charge of the centre
 Helps in motivating managers and encourages
them to take initiatives

 ADVANTAGES OF PROFIT
CENTRES
 Help in increasing the speed of making
operating decisions
 Decision-making authority lies with managers
 Headquarters can concentrate on broader issues
of the organization
 Managers use imagination, take initiatives

 DISADVANTAGES OF PROFIT
CENTRES
 Management can’t have considerable control
over different profit centers when decisions are
centralized
 Management has to depend on management
control reports which may not be as effective
 Organizational units compete with one another,
sometimes resulting in conflict

 TYPES OF PROFIT CENTERS
 Marketing


 Manufacturing


 Finance


 MEASURING PROFITABILITY
 Two types of Measuring Profitability :-
ØManagement Performance
ØEconomic Performance


 MANAGEMENT PERFORMANCE used for

planning, controlling, etc.


 Difference between management and

economic performance

 TYPES OF PROFITABILITY
MEASURES
 Contribution Margin- Used on the premise that since fixed
expenses are not controllable by the manager , focus
should rest on maximizing the difference between
revenues and variable expenses
 Direct Profit- It helps in understanding the contribution of
the profit centre to the general overhead profit of the
organization
 Controllable Profit- It includes expenses controlled by the
business unit manager
 Income before taxes- In this method all corporate overhead
profit is allocated to the profit centre
 Net Income- In it, the performance is measured by taking
into consideration the net income after the payment of
taxes.

INVESTMENT CENTERS
 INVESTMENT CENTERS
Power to influence the size of investment &
profit variables.

Maximization of profit.

It a yardstick to measure the economic
performance.
 COST CENTERS
Minimizing variance between actual & standard cost.

Forms the basis of cost measurement.


A cost center is a myriad of different costs.

ØProduction Cost
ØService Cost
ØAncillary Manufacturing Center
 PERFORMANCE MEASUREMENT OF
DECENTRALISED OPERATIONS

 Measuring Divisional Operations:

 ROI ( Return on Investment)


 Setting transfer prices

ØGoal Congruence
ØFairness in Setting Transfer Prices

THANK YOU
GROUP-3
Avni Kamdar
Bhoomika Dhawan
Chandan Sukul
Gaurav Ahluwalia
Gopal Krishna Das
Harvir Gill
Harsimran Singh