A responsibility center is a functional entity within a business that has its own goals and objectives, dedicated staff, policies and procedures, and financial reports. Such a center is used to tie specific responsibility for revenues generated, expenses incurred, and/or funds invested to individuals. This allows the senior managers of a company to trace all financial activities and results of a business back to specific employees. Doing so preserves accountability, and may also be used to calculate bonus payments for employees.
A responsibility center may be one of four types, which are:
- Revenue center. This group is solely responsible for generating sales. A typical revenue center is the sales department.
- Cost center. This group is solely responsible for the incurrence of certain costs. A typical cost center is the janitorial department.
- Profit center. This group is responsible for both revenues and expenses, which result in profits and losses. A typical profit center is a product line, for which a product manager is responsible.
- Investment center. This group is responsible not only for profits, but also for the return on funds invested in the group's operations. A typical investment center is a subsidiary entity, for which the subsidiary's president is responsible.
There may be many responsibility centers in a business, but never less than one such center. Thus, a responsibility center is usually a subset of a business.
From an accounting perspective, a financial report should be issued to each responsibility center that itemizes the revenues, expenses, profits, and/or return on investment for which the manager of each center is solely responsible. This can result in quite a large number of customized reports being issued on an ongoing basis.
The use of multiple responsibility centers requires a certain amount of corporate infrastructure to develop each center, track its results, and manage expectations with the various managers.