Management Responsibility and Performance Measurement

Management Responsibility and Performance Measurement

• Managers need to monitor their section's performance to ensure organizational objectives are met. Control measures are essential.
• Responsibility Centres are parts of an organization with measurable performance, directly managed and responsible.

Types of Responsibility Centres

• Cost Centres: A specific location, function, activity, or equipment where costs are determined. Managers are responsible for costs incurred within the centre.

  • Examples include production departments (mixing, packaging), service departments (stores, maintenance, canteen), and administrative/sales departments within a manufacturing company or audit/tax/accounting departments in a practice.
  • Cost analysis allows relating costs to individual products/services, planning future costs, and controlling costs.

• Profit Centres: Units where both costs and revenues are measured, allowing profit determination. Managers are responsible for costs, revenues, and profit.

  • Examples are specific sites/factories within a manufacturing company or specific types of business within a practice
  • All profit centres are also cost centres, but not all cost centres are profit centres.
  • Profit analysis is used for planning future profits, controlling costs and revenues, and measuring management performance.

• Investment Centres: Units where costs, revenues, and net assets are measured, with responsibility for capital investment and performance measured by returns on investment. Managers are accountable for costs, revenues, profit, and assets.

  • Examples are groups of sites/factories or multiple branches in a service company.
  • Investment centres can have several cost and profit centres within them.

Performance Measures

• Cost Centres:

  • Productivity: Output to input ratio. Measures efficiency of resource use.
  • Cost per unit: Total cost divided by units produced.
  • Indices: Tracks changes in variables (e.g., material cost) over time. Calculated as (current value/base value) x 100%.

• Profit Centres:

  • Profit Margin: Profit divided by sales, x 100%. Important for control measures.
  • Cost-to-Sales Ratio: Costs incurred related to sales value. Helps with cost control and profitability.
  • Gross Profit Margin: Gross profit divided by sales, x 100%.

• Investment Centres:

  • Return on Investment (ROI) / Return on Capital Employed (ROCE): Profit before interest and tax divided by capital employed, x 100%. Measures profit relative to resources invested.
    • Capital Employed = Total Assets – Current Liabilities
  • Residual Income: (Not defined fully in this text).