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    The document discusses responsibility accounting and different types of responsibility centers. It defines responsibility centers as parts of an organization whose managers are accountable for costs, profits, or investments. The three primary responsibility centers are cost centers, whose managers control costs; profit centers, whose managers control costs and revenue; and investment centers, whose managers control costs, revenue, and investments. Cost center managers are evaluated on cost minimization, profit center managers on profits, and investment center managers on returns on investment.

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    Notes_Lecture 7.2

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    The document discusses responsibility accounting and different types of responsibility centers. It defines responsibility centers as parts of an organization whose managers are accountable for costs, profits, or investments. The three primary responsibility centers are cost centers, whose managers control costs; profit centers, whose managers control costs and revenue; and investment centers, whose managers control costs, revenue, and investments. Cost center managers are evaluated on cost minimization, profit center managers on profits, and investment center managers on returns on investment.

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    6 views2 pages

    Responsibility Accounting: Investment Centers

    Uploaded by

    Consumer DigitalProduct
    The document discusses responsibility accounting and different types of responsibility centers. It defines responsibility centers as parts of an organization whose managers are accountable for costs, profits, or investments. The three primary responsibility centers are cost centers, whose managers control costs; profit centers, whose managers control costs and revenue; and investment centers, whose managers control costs, revenue, and investments. Cost center managers are evaluated on cost minimization, profit center managers on profits, and investment center managers on returns on investment.

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    of 2

    Responsibility Accounting

     Decentralized organizations need responsibility accounting systems that link lower


    level managers’ decision-making authority with accountability for the outcomes of
    those decisions.
     The term responsibility center is used for any part of an organization whose
    manager has control over and is accountable for cost, profit, or investments.
     The three primary types of responsibility centers are cost centers, profit centers, and
    investment centers.

    Cost Center

     The manager of a cost center has control over costs, but not over revenue or the use
    of investment funds. Service departments such as accounting, finance, general
    administration, legal, and personnel are usually classified as cost centers.
     In addition, manufacturing facilities are often considered to be cost centers.
     The managers of cost centers are expected to minimize costs while providing the
    level of products and services demanded by other parts of the organization.
     For example, the manager of a manufacturing facility would be evaluated at least in
    part by comparing actual costs to how much costs should have been for the actual
    level of output during the period.
     Flexible budget variances are often used to evaluate cost center performance.

    Profit Center

     The manager of a profit center has control over both costs and revenue, but not
    over the use of investment funds.
     For example, the manager in charge of a Six Flags amusement park would be
    responsible for both the revenues and costs, and hence the profits, of the
    amusement park, but may not have control over major investments in the park.
     Profit center managers are often evaluated by comparing actual profit to targeted or
    budgeted profit.

    Investment Center

     The manager of an investment center has control over cost, revenue, and
    investments in operating assets.
     For example, General Motors ’ vice president of manufacturing in North America
    would have a great deal of discretion over investments in manufacturing—such as
    investing in equipment to produce more fuel efficient engines. Once General Motors’
    top-level managers and board of directors approve the vice president’s investment
    proposals, he is held responsible for making them pay off.

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     Investment center managers are often evaluated using return on investment (ROI) or
    residual income measures.

    Self-review Questions

    Find a few examples of three responsibility centers of any firm of your choice and identify
    their responsibilities.

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