The Budgetary Control
Budgets are the most widely used control system, because the plan and control resources and revenues are essential to the firm's health and survival.
Budgeting is the formulation of plans for a given future period in numerical terms. By stating plans in terms of numbers and breaking them into parts of an organization, budgets correlate planning and allow authority to be delegated without loss of control.
A responsibility centre is an organizational subsystem charged with a well-defined mission and headed by a manager accountable for the performance of the centre. "Responsibility centres constitute the primary building blocks for management control." It is also the fundamental unit of analysis of a budget control system. A responsibility centre is an organization unit headed by a responsible manager.There are four major types of responsibility centres: cost centres, revenues centres, profit centres and investment centres.
- Cost Centre
- A cost centre is a responsibility centre in which manager is held responsible for controlling cost inputs. There are two general types of cost centres: engineered expense centres and discretionary expense centres. Engineered costs are usually expressed as standard costs. A discretionary expense centre is a responsibility centre whose budgetary performance is based on achieving its goals by operating within predetermined expense constraints set through managerial judgement or discretion.
- Revenue Centre
- A revenue centre is a responsibility centre whose budgetary performance is measured primarily by its ability to generate a specified level of revenue.
- Profit Centre
- In a profit centre, the budget measures the difference between revenues and costs.
- Investment Centre
- An investment centre is a responsibility centre whose budgetary performance is based on return on investment.
The uses of responsibility centres depend to a great extent on the type of organization structure involved.
Engineered cost centres, discretionary expense centre, and revenue centres are more often used with functional organization designs and with the function units in a matrix design.
In contrast, with a divisional organization designs, it is possible use profit centres because the large divisions in such a structure usually have control over both the expenses and the revenues associated with profits.