Page 72 - DMGT514_MANAGEMENT_CONTROL_SYSTEMS

Unit 4: Responsibility Centers

In order to decide, whether to continue or discontinue division Y, it is necessary to find out Notes
whether all these fixed and attributable costs are avoidable, otherwise the closure of the division
would cause a larger deficit to the corporate income.

Self Assessment

Multiple Choice Questions:
6. In what type of responsibility centre does the control system measure the monetary value
of inputs and outputs?

(a) Investment centre (b) Profit centre
(c) Expense centre (d) None of the above
7. Which of the following organization is characterized by the conspicuous absence of
sub-units?
(a) Matrix structure (b) Profit centre
(c) Centralized organization (d) None of the above

8. What are the costs for which a technical relationship can be established between cost and
output known as?
(a) Direct costs (b) Indirect costs

(c) Discretionary costs (d) Engineered costs
9. Which one is a special type of profit centre in which, apart from profit, the management’s
attention is also focused on the assets employed in earning the profit?

(a) Investment centre (b) Profit centre
(c) Expense centre (d) None of the above

4.7 Investment Centres

It is defined as a responsibility centre in which inputs are measured in terms of cost/expenses
and outputs are measured in terms of revenues and in which assets employed are also measured.
In other words, investment centres consider not only costs and revenues but also assets used in
the division. As a responsibility centre, the performance of a unit would be measured in relation
to the revenues / profits and the assets employed in a division. The essence of investment centre
analysis is the relationship between the profits and the assets that are used to generate those
profits. It may, therefore, be said to be an extension of profit centre, since it covers all the
elements relevant to the measurement of the overall performance of the firm’s/its various
divisions. However, the investment centre is one step above a profit centre, in terms of the
additional financial data (assets).
The investment centre analysis can be used as a basis for evaluating the contribution of a
division as an entity as also the performance of a divisional manager. The measure of performance
in an investment centre is based on the relationship between the profits/income and the assets
employed in generating the profits.

Notes There are two ways to relate income to assets: (i) Return on Investment (ROI)
analysis and (ii) Residual Income (RI) analysis or Economic Value Added (EVA).

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