Responsibility Center - Explained
What are Cost, Profit, and Investment Centers
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Table of ContentsWhat are Responsibility Centers?What is a Cost Center?What is a Profit Center?What is an Investment Center?
What are Responsibility Centers?
Responsibility centers are categorized depending on the level of control over revenues, costs, or investments.
Responsibility centers can be based on such attributes as sales regions, product lines, or services offered.
The purpose of establishing responsibility centers within organizations is to hold managers responsible for only the assets, revenues, and costs they can control.
The level of control a manager has over a segment’s assets, revenues, and costs will help determine the type of responsibility center used for each manager.
What is a Cost Center?
A cost center is an organizational segment that is responsible for costs, but not revenue or investments in assets.
Service departments, such as accounting, marketing, computer support, and human resources, are cost centers.
Managers of these departments are evaluated based on providing a certain level of services for the company at a reasonable cost.
Production departments within a manufacturing firm are also treated as cost centers.
Production managers are evaluated based on meeting cost budgets for producing a certain level of goods.
What is a Profit Center?
A profit center is an organizational segment that is responsible for costs and revenues (and therefore, profit), but not investments in assets.
Managers of profit centers are responsible for revenues, costs, and resulting profits.
Profit center determination must be made on a case-by-case basis, and it depends on the level of responsibility assigned to the store manager.
Methods of performance evaluation for profit centers vary.
Some organizations compare actual profit to budgeted profit. Others compare one profit center to another.
Also, some organizations use segmented income statement ratios, such as gross margin or operating profit, to compare current profit center performance to prior periods and to other profit centers.
What is an Investment Center?
An investment center is an organizational segment that is responsible for costs, revenues, and investments in assets.
Investment center managers have control over asset investment decisions.
In many cases, investment centers are treated as stand-alone businesses.
Several measures can be used to evaluate the performance of investment center managers, including segmented net income, ROI, RI, and economic value added (EVA).
- Job Costing vs Process Costing
- Assign Overhead Costs to Products
- Plantwide Cost Allocation
- Department Cost Allocation
- Activity-Based Costing
- Weighted-Average Cost of Products
- Production Cost Report
- Fixed, Variable, and Mixed Cost Estimations
- Contribution Margin Income Statement
- Cost-Volume-Profit Analysis
- Margin of Safety
- Contribution Margin per Unit of Constraint
- Absorption Costing vs Variable Costing
- Differential Analysis and Decisions
- Cost Decisions for Joint Products
- Capital Budgeting
- Life Cycle Costing
- The Master Budget
- Activity-Based Budgeting
- Standard Costs
- Imputed Value
- Variance Analysis for Product Costs
- Absorption Pricing
- Price Variance
- Absorption Variance
- Responsibility Centers
- Comparing Segmented Income
- Using ROI to Evaluate Performance
- Using Residual Income to Evaluate Performance
- Use Economic Value Added to Evaluate Performance
- Transfer Pricing
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