When a company is divided into different sub-units according to the responsibility and for each sub-unit, an individual is made responsible, than the sub-unit which is formed is called responsibility center. The individual is held accountable for all the activities which are done by that subunit. Under modern budgeting and control the concept of responsibility centers for the purpose of control. Responsibility centers can be classified as follows –
1. Cost center – . It is defined as a subunit for which cost may be ascertained for the purpose of cost control. Research and development department is an example of cost center. Cost center are those which helps indirectly in generating the revenue for a company.
2. Profit center – It refers to that subunit which has the responsibility of generating and maximizing the profits of the company. It also includes maximizing the revenue of the company because without generating revenue, profits will not increase.
3. Investment center – It refers to that subunit or center which is responsible for earning an optimum return on investments made by the company.
4. Revenue center – It refers to that subunit or center which has the primary objective of raising revenue with no responsibility for production or profit. Sales centre is an example of revenue center. The scope of revenue center is narrow than that of profit center.