A responsibility center is a unit of management within an organization. As an important part of responsibility-based accounting, such a center helps break down a large organization, such as a corporation or franchise business, into easily analyzed segments. Responsibility centers may have different functions, and are usually classified as cost centers, profit centers, or investment centers.
Each responsibility center is under the care of a manager or small management team. This helps place accounting duties into the hands of a trustworthy worker, in order to ensure accurate reporting. The responsibility level of each unit may vary according to its place in the business; in a jewelry store chain, the lowest level unit might be the manufacturing plant or artisan workplace, a medium responsibility unit might be an individual store, and the highest level unit might be the Chief Executive Officer or Chief Financial Officer of the company. By dividing an organization up into smaller units of management, it can be easier to identify financial strengths and weaknesses throughout the entire business.
Cost centers are usually the most basic unit of responsibility accounting. These are units in which the function is to incur costs in order to promote or assist the business in some way. In a manufacturing plant, the front office might be considered a cost center, since it does not directly create profit. Depending on the specific accounting structure of the organization, any area that incurs costs without accessing profits is considered a cost center.
Profit centers usually have characteristics of cost centers, but also must generate profit. In a clothing company, a storefront incurs costs through salaries paid to workers as well as through rent, utilities, and furnishings. The basic function of a storefront, however, is to create profit by selling goods or services. Creating an accounting report from a profit-based responsibility center is generally more complex than from a cost center, since the report must consider the proportion of sales to costs compared to company goals.
A third type of responsibility center is the investment unit. This is typically handled by upper level management, and is somewhat different than the previous two categories. Instead of worrying about direct manufacturing or operating costs and direct profits, an investment center must concern itself with the overall returns on investments under its purview. This may include investing company capital in stocks and other ventures, but an investment center may also be charged with creating business expansion strategies that will not endanger the profit margin. Every time a franchise opens a new location, a responsibility center tasked with investing may need to justify the costs of the new location based on the likelihood or forecast of reliable returns.