Types of Responsibility Centres

Investment Center
Objective – Make sound investment decision.

It compares business units profits with assets employed to earn that profit i.e.
efficiency of assets employed.

It satisfies both the goals of business organizations i.e.

▪ To earn the profit
▪ To achieve optimal relationship in profits earned and assets employed
➢ An investment center is a business unit in an organization that can
utilize capital to contribute directly to a company’s profitability.
Companies evaluate the performance of an investment center according
to the revenues it brings in through investments in capital assets
compared to the overall expenses.

➢ An investment center is sometimes called an investment division.

➢ The financing arm of an automobile maker or department store is a

common example of an investment center.
➢ Investment centers are increasingly important for firms as
financialization leads companies to seek profits from investment and
lending activities in addition to core production.
 Incremental Analysis in the Responsibility Center

Incremental analysis is used to find the impact of changes in

costs or revenues, given a specific potential scenario.
Decisions involving incremental analysis include the
following:
▪ M a k e or buy (Profit Center)
▪ S e l l or process further (Revenue Center)
▪ Special order (Cost Center)
▪ Changes in production and/or technology (Investment
Center)
 Identify each of the following as a cost center, a
discretionary cost center, a revenue center, a profit
center, or an investment center.

1 . The manager of center A is responsible for generating cash inflows

and incurring costs with the goal of making money for the
company. The manager has no responsibility for assets.

2. Center B produces a product that is not sold to an external party.

3 . The manager of center C is responsible for the telephone order

operations of a large retailer.

4 . Center D designs, produces, and sells products to external parties.

The manager makes both long-term and short-term decisions.
 Solutions
1 . The manager of center A is responsible for generating cash
inflows and incurring costs with the goal of making money for
the company. The manager has no responsibility for assets. P
2 . Center B produces a product that is not sold to an external party.
C
3 . The manager of center C is responsible for the telephone
order operations of a large retailer. R
4 . Center D designs, produces, and sells products to external
parties. The manager makes both long-term and short-term
decisions. I
 Identify the most appropriate type of responsibility
center for each of the following organizational units.
➢ A pizza store in a pizza chain
➢ The ticket sales center of a major airline
➢ The South American segment of a multinational
company
➢ A subsidiary of a business conglomerate
➢ The information technology area of a com
➢ A manufacturing department of a large corporation
An eye clinic in a community hospital
➢ The food-service function at a nursing home
➢ The food-preparation plant of a large restaurant chain
The catalog order department of a retailer
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➢ A pizza store in a pizza chain P
➢ The ticket sales center of a major airline R
➢ The South American segment of a multinational company I
➢ A subsidiary of a business conglomerate I
➢ The information technology area of a company DC
➢ A manufacturing department of a large corporation C
➢ An eye clinic in a community hospital P
➢ The food-service function at a nursing home C
➢ The food-preparation plant of a large restaurant chain C
➢ The catalog order department of a retailer R
A simple summary of the
responsibility centers
Output measured in
Revenue Center monetary terms

Expense/Cost Centers Input measured in

monetary terms

Profit Centers Output measured in

monetary terms

Investment Centers Output measured in

monetary terms