by D. Victor

Created on: January 11, 2010   Last Updated: March 05, 2010

Management, cost and financial accounting all have a context. Their role is to transform financial (and sometimes non-financial) data into information for accounting users. Management accounting seeks to provide internal information users with data.

As such, a management accountant must know the information needs and requirements of managers and other internal users. The classification of responsibility centres into cost, profit, revenue and investment centres assist management accountant in understanding the needs of the managers.

The classification of responsibility centres is important because each one has a specific jurisdiction. Cost centres (CC) are the fundamental area, since costs fall under the purview or profit and investment centres as well. Revenue centres (CC) deal almost exclusively with sales and revenue. Managers of profit and investment centres have additional responsibilities and performance measures. As a result, the information needs of the managers will differ according to the responsibility.

Since the users of management accounts are managers, it is easy to perceive how it would affect how management accounts are produced. After all, such accounts are necessary for planning, control and decision-making. For profit and investment centres, accountants must consider the additional information requirements and performance measures of management in order to provide relevant information.

CCs refer to any project, unit, equipment or department for which costs are determinable. As such, cost accounting techniques and methods are very relevant to any centre that has a cost function. Budgets, forecasts and control would be facilitated by costing in these areas. The accountant would also be concerned with the cost units or objects in these centres, since the cost unit is the basis for cost analysis in a cost centre.

Profit centre managers are responsible for costs and revenues. Their performance is measured by the profit margin. Therefore, the management information that they require should enable them to develop an optimal balance between costs and revenue—particularly variable costs and revenue. The profit centre manager is likely to be concerned with the relationship between variable costs and revenues and analyses that help monitor the profit margins of a product or unit.

Investment centres are profit centres with additional responsibilities. As such, the investment centre manager would be concerned with the rate of return and valuation of non-current assets primarily. However, the I.C. is also responsible for costs and revenue, making all information that is relevant in a profit centre relevant to the I.C.

Revenue centre managers are almost exclusively concerned with sales and revenue. In light of that, the manager is unlikely to need information on cost behaviour. The R.C. manager is likely to be concerned with the viability of markets and orders, pricing decisions and sales information from competitors. A source of information for revenue centres might also include financial accounts of competitors.

Since accounting information should be relevant, it is important for management accountants to be aware of the needs of different managers according to the responsibility centre that they operate. Apart from being a premise to assess information needs, responsibility centres also enable cost classification in an organisation.

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