Management accounting establishes performance measures of individuals and organisation. Performance measurement cannot be addressed by financial accounting only and hence tools devised by management accounting need to be deployed to achieve segment’s and/or manager’s performance measures in a given period.
A Responsibility centre is any part of an organization. It may be a product line, a geographical area, or any other meaningful unit.
This is achieved by implementing multiple elements such as cost centres, profit centres and responsibility centres. A Responsibility centre is any part of an organization. It may be a product line, a geographical area, or any other meaningful unit. Cost Center is sub-element and responsible only for the costs (any revenue it may earn is immaterial). Revenue Centers are implemented only on transactions generating revenues and is not measured by its expenses. Profit Centre is used for both of the costs and generating revenue. However, due to the advancement of ERP Revenue Centre and Profit Centre are taken as same. Cost centre with direct cost elements is mapped to their respective Profit Centre and act as a deduction to arrive at segment contribution margin. Non-Direct and Uncontrollable Cost Centers do not become part of Segment performance and charged to the organisation, There can be controlling manager for these cost centres like Admin Department Head etc.
Evaluating Manager / Department
On every occasion an evaluation of a manager or department is made, it is vital that they are evaluated only on Cost and Profit centres that they are able to control. This is where designing of Profit & Cost centre becomes essential and should be based on the distinction between controllable and uncontrollable costs elements so they are identifiable and recorded in the Accounting System in the same way.
This brings us to Contribution Income Statement. Contribution margin is a difference in selling price and all variable expenses whether production and non-production variable expenses. However, there are some fixed costs which are controllable by the Manager or Departments. After deduction of Controllable fixed cost, we can arrive at Controllable Margin. Controllable Margin is the point of evaluating Manager and Noncontrollable, traceable fixed costs are the point of evaluation of the Segment or Division.
Accounting systems / ERPs should be implemented in a way that it can support decision support through performance management and control.
