Question

1. Find an everyday item at your house and consider the manufacturing company that made that item. Now describe a cost center, profit center, and investment center that the manufacturing company that made your item might use.

Answer 1

In managerial accounting, a “cost center” is a subset of an entire company (perhaps a division, but more likely a department) that is responsible for generating costs, but does not have any direct responsibility for revenues. Examples of possible cost centers could include a human resources department, a maintenance department, or an information technologies department. Cost center accounting computes the direct costs incurred by the center and compares them to a budget. Frequently, indirect costs are also factored in. For example, the maintenance department might be charged for a portion of the costs of the human resources department based on how many people are employed as maintenance workers. The manager of the cost center is responsible for holding total direct and indirect costs to no more than the budgeted amounts.

Profit centres are like revenue centres, but they are also responsible for managing costs, not just generating revenue. In a lot of companies, profit centres are assessed as separate businesses, and could be something like a product line.

Investment centres are different from revenue or profit centres because they are assessed on their use of capital. So, not only are they assessed on profit (revenues and costs), but how the generation of profit compares to what assets are owned by the centre