A responsibility center is a segment or subunit of a company whose manager is held accountable for activities within that responsibility center. There are four types of responsibility centers: cost centers, revenue centers, profit centers, and investment centers. Cost center managers are only accountable for costs, while revenue center managers are only accountable for revenues/sales. Profit center managers are accountable for both costs and profits. Investment center managers are accountable for costs, revenues, and investments.
Companies use responsibility centers to receive feedback about each centers’ managers’ performance compared to a budget. Executives at the company can then use this feedback to discover early warning signs that managers need to make changes to their strategies, to determine how well managers are implementing the company’s strategies, and/or to evaluate if a manager’s strategies are ineffective.
Different companies hold their managers accountable in different ways. Some companies focus only on factors that a manager can control and evaluate performance based on comparisons to managers at competing companies. Other companies evaluate their managers based on factors that they both can and cannot control to see which managers have the most knowledge and ability to respond to uncontrollable conditions. Finally, some companies don’t focus on controllable or uncontrollable factors at all and, instead, focus on how well managers met their budgets.”