A healthcare organization’s perception, development, and governance concentrate on responsibility centers, a company’s organizational unit with a specific manager with authority and control over spending, earning, or investing. According to Lita Epstein & Arnold Schneider, in Accounting for Healthcare Professionals (2014), “Responsibility centers can be subdivided into three groups: cost centers (such as facilities management departments in a clinic or hospital setting), profit centers (such as patient care areas where revenues are generated), and investment centers (such as medical research departments where new medical treatments are developed). (p. 273) How to categorize any given department of a corporation is dependent on which piece of the business the department has power over. A manager will prepare a responsibility report to evaluate the performance of each center. This information will associate the responsibility center’s cost performance with its actual performance, gauging, and interpreting specific variances. Responsibility reports will include controllable costs so that managers are not held answerable for activities they do not have governance over. The more flexible a budget, the more helpful the report will be.
Under the responsibility center budgeting, all relevant costs and revenue to support these costs are assigned to various organizational units (i.e., departments, bureaus, and programs) labeled as responsibility centers. Responsibility center budgeting strives to allocate responsibility to those persons, managers, who have the utmost potential to impact the costs in question. It allocates managers as the persons in the best position to clarify why particular results have happened as an outcome of assigning funds to support these units’ undertakings. The managerial reporting explains the outcome, notwithstanding the amount of their regulation or influence over the results.
A cost center is a responsibility center where control exists over liabilities. Usually, cost centers produce goods or provide services to other parts of an organization. Because they make goods or services, they do not have governance over sale/service prices and, therefore, are evaluated based on their total costs. Often they are defined by an organizational chart and may be subdivided into more cost centers to link them for cost determination and management purposes. A cost center is the smallest unit of a business where costs and activities are measured. Cost centers can reduce costs by purchasing inferior materials, which ultimately diminishes the finished product quality. Managers are responsible for the quality of goods/services being provided.
Whereas a profit center is a responsibility center where governance occurs over producing profits and acquiring related costs. They are an organization within an organization, whose managers have ultimate power over revenues and expenses. These centers do have the power to set their prices for goods/services being provided. Entities such as a podiatry clinic are profit centers that produce revenues from the cost of services and have their marketing expenses. These centers are evaluated based on controllable margins; the beauty of operating a profit center gives managers motivation to participate in earning profits.
Other subdivided centers, such as revenue centers, are established so that the manager has revenue responsibility but not full control over expenses. Evaluation of a revenue center’s performance is to ignore everything but its revenue. A drawback to this responsibility center is that evaluations are based on sales/services, so controlling costs can be an issue. For instance, Kaiser Permanente has a benefits insurance center through its membership service network. They are responsible for bringing new patients in underemployment, individual, or Medicare plans. Their responsibility is the birth of new healthcare contracts, hence, producing new revenue.
Managers of investment centers govern expenses, profits, and investment in resources used or managed. Supervisors have the power to procure or dispose of revenue. Return on investment or ROI is used to evaluate their performance. To improve investment returns, the manager can either increase governable margins (profits) or reduce regular operating costs (improve productivity). In large healthcare, organizations divisions are considered to be investment centers. For instance, a pulmonary and respiratory disease division who cares for infants, children, and young adults with acute respiratory disorders may be classified as an investment center.
References
Schneider, A. & Epstein, L. (2014). Accounting for Healthcare Professionals (E-Text). San Diego, CA: Bridgepoint Education, Inc.
Tracy, J. A. (2008). Accounting for Dummies 4th Edition (E-Text). Hoboken: Wiley Publishing, Inc. Retrieved September 12, 2016, from http://site.ebrary.com.proxy-library.ashford.edu/lib/ashford/detail.action?docID=10296724