Updated: Nov 8, 2022
The concept of Responsibility Centres is flexible and can be used to analyse different transactions.
It is important to establish the alignment between legal, accounting, and economic reality according to the business model and to determine how the various key functions are divided between the company's operations.
For example, is the function a cost centre or a profit centre? Is the function responsible for generating profit or reducing costs?
Use this information to define the Responsibility Centres within the group. However, note that the classification of Responsibility Centres is based on underlying economic realities and focuses on the functions performed, assets used, and risks assumed by the entity.
Taking sales activities as an example:
Investment centre: responsible for the Group's operating results, long-term strategic development and control, assumes the principal risks of the Group, and, at the same time, is responsible for the continuity of the business operations.
The profit margin obtained by the investment centre should be structured in such a way as to provide an adequate return on investment or return on assets, including residual profits from the Group's operations.
Cost centres: are responsible for operating as efficiently as possible, producing a predetermined quantity of products according to predetermined quality and delivery conditions.
Profit centres: are accountable for maximising profits through increased revenues or reduced costs. The profit centre can earn additional profits (so-called "residual profits").
Revenue centres: Sales companies within multinational companies are responsible for sales, and another part of their responsibility relates to earning marginal gross profit. Its functional responsibilities correspond to its label "revenue centre", whose main objective is to maximise sales volume, considering cost constraints, and for which the operating margin is usually an indicator.
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