Page 205 - DMGT403_ACCOUNTING_FOR_MANAGERS

Accounting for Managers

Notes 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.

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.

Task Analyse different centers of a food chain of your choice and categorise them into
various types of responsibility centers.

9.5.4 Zero Based Budgeting

Zero-base budgeting is one of the renowned managerial tool, developed in the year 1962 in
America by the Former President Jimmy Carter. The name suggests, it is commencing from the
scratch, which never incorporates the methodology of the other types of budgeting in determining
the estimates. The Zero base budgeting considers the current year as a new year for the preparation
of the budget but the yester period is not considered for consideration. The future activities are
forecasted through the zero base budgeting in accordance with the future activities.

Peter A Pyher “A planning and budgeting process which requires each manager to justify his
entire budget request in detail from scratch (Hence zero base) and shifts the burden of proof to
each manger to justify why he should spend money at all. The approach requires that all activities
be analysed in “decision packages” which are evaluated by systematic analysis and ranked in
order of importance.”
This type of budgeting requires the manager to reason out the aim of spending, but in the case
of traditional budgeting is unlike, which are never emphasize the reasons of spending in terms
of expenses.

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