Question

“Strategy, plans, and budgets are unrelated to one another.” Do you agree? Explain. Explain how the manager’s choice of the type of responsibility center (cost, revenue, profit, or investment) affects the behavior of other employees.

Answer 1

I do not agree with this statement. Firstly the management should have clear goals and objectives. This helps the management to make plans and make a budget. After the budget has been set in place and approved, the strategy is decided upon. So they are inter-related.

The choice of the type of responsibility center affects the behaviour of the managers as well as the employees. So if the responsibility center is a cost centre, the focus is on cost reduction. For a revenue center, the focus is always on increasing the revenues and contributing highest to the company's revenues in total. For a profit center, both revenues and costs are taken into account. The employees are pushed to increase revenues and reduce costs so as to earn maximum profits. Finally the invenstment center encourages the management to think on the lines of maximum investments.