Page 207 - DCOM302_MANAGEMENT_ACCOUNTING
P. 207
Management Accounting
Notes The goal is to control costs while maintaining enterprise effectiveness.
Non-financial metrics are also useful in monitoring cost centers: documents processed, error
rates, customer satisfaction surveys, and other similar measures can be used.
Example: 1. The manager for purchasing department.
2. The manager for maintenance department.
10.1.2 Revenue Center
Revenue center can be defined as a distinctly identifiable department, division, or unit of a firm
that generates revenue through sale of goods and/or services.
Example: Rooms department and food and beverages department of a hotel.
10.1.3 Profit Center
Some business units have control over both costs and revenues and are therefore evaluated on
their profit outcomes. For such profit centers, “cost overruns” are expected if they are coupled
with commensurate gains in revenue and profitability.
Example: A restaurant chain may evaluate each store as a separate profit center. The
store manager is responsible for the store’s revenues and expenses. A store with more revenue
would obviously generate more food costs; an assessment of food cost alone would be foolhardy
without giving consideration to the store’s revenues.
Thus profit center is a segment of a business, often called a division that is responsible for both
revenue and expenses. The reason been Revenue minus Cost is the Profit.
The manager is therefore overall responsible or accountable for making profit for the company.
Example: A company has many restaurants which are all profit centre. A manager is
assigned to each restaurant to make sure it is a profit centre.
10.1.4 Investment Center
At higher levels within an organization, unit managers will be held accountable not only for
cost control and profit outcomes, but also for the amount of investment capital that is deployed
to achieve those outcomes. In other words, the manager is responsible for adopting strategies
that generate solid returns on the capital they are entrusted to deploy. Evaluation models for
investment centers become more complex and diverse. They usually revolve around various
calculated rates of returns.
Thus an investment center, like a profit center, is responsible for both revenue and expenses, but
also for related investments of capital.
Example: An example of an investment centre is a Corporate division responsible for
project investments.
Here, the manager is responsible for the investments which includes all the revenue, costs and
investments (invested capital or assets).
Outside of relatively large corporations, the cost center is the most common building block for
responsibility accounting. In fact, the terms cost center and responsibility center are often used
interchangeably.
202 LOVELY PROFESSIONAL UNIVERSITY
