Responsibility accounting and cost centres

Responsibility accounting organises budgets and reports around people: every cost, revenue and asset is assigned to the manager who has the authority to influence it, and each manager's report shows what they're accountable for. Marlow Hotels Group runs it at four levels:

• Cost centre — the manager controls costs only. Housekeeping at the Harbourside hotel.
• Revenue centre — the manager controls revenue (and perhaps direct selling costs). The group reservations team.
• Profit centre — revenues and costs. The Harbourside general manager.
• Investment centre — profit and the assets used to earn it, including capital spending decisions. The Northern region director.

The controllability principle: judge managers only on what they can significantly influence. A housekeeping manager controls staff hours, supplies usage and laundry volumes. They don't control the building's depreciation, the insurance premium or head office's HR recharge. Those costs are still real and someone owns them — but putting them in the housekeeping manager's variance demotivates and misdirects. Good reports show controllable items first, then allocated or uncontrollable items separately (or not at all), so readers can tell performance from allocation.

Investment centres need a measure that relates profit to the assets employed: - Return on investment (ROI) = controllable operating profit ÷ investment (net assets) × 100. - Residual income (RI) = controllable operating profit − (investment × the group's cost of capital).

ROI is easy to compare across divisions, but a manager judged on ROI may reject a project that beats the cost of capital simply because its return is below the division's current ROI. RI avoids that: any project earning more than the cost of capital raises RI.