Question

In Managerial Accounting, the following terms are Investment center, Decentralization and cost center are discussed broadly. Please explain these terms briefly and give areal world example for each of these terms?

Answer 1

In Management Accounting or managerial accounting, managers use the provisions of accounting information in order to better inform themselves before they decide matters within their organisations, which aids their management and  performance of control functions. The terms in managerial accounting like Investment Center, Decentralisation and Cost Center are discussed as under :

• Investment Center : You could call investment centers the luxury cars of responsibility centers because they feature everything. Managers of investment centers have authority over - and are held responsible for - revenues, expenses and investments made in their centers. Return on investment (ROI) is often used to evaluate their performance. To improve return on investment, the manager can either increase controllable margin (profits) or decrease average operating assets (improve productivity). Using return on investment to evaluate investment centers addresses many of the drawbacks involved in evaluating revenue centers, cost centers and profit centers. However, classification as an investment center can encourage managers to emphasize productivity over profitability - to work harder to reduce assets ( which increases ROI ) rather than to increase overall productivity.

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.

• Decentralization : Decentralization is the process of moving decision making powers down the chain of command. In a highly decentralised organisation, frontline managers and staff often make impottant decisions. On the other hand, in a highly centralized organisation, senior managers at the top of the organisation chart make the decisions. In decentralisation, large corporations may need to oversee many diverse subsidiaries, making it impossible for a top-level manager to call all the shots. Frontline employees usually have closer access to the information needed to make decisions, enabling them to respond more quickly than senior managers can. Decentralisation empowers employers to make more independent decisions with less red tape from the senior managers, often improving employee morale. It facilitates speedy customer service because it doesn't require employees to wait for supervisor approvals.

  The Internet and in particular Bitcoin are the two best examples of something resembling true decentralization in history, where pretty much every participant got equal access at a relatively reasonable pace ; even then, there are some centralization issues.

• Cost Center : Cost centers usually produce goods or provide services to other parts of the company. Because they only make goods or services, they have no control over sales prices and therefore can be evaluated based only on their total costs. One way for a cost center to reduce costs is to buy inferior materials, but doing so hurts the quality of finished goods. When dealing with cost centers, you must carefully monitor the quality of goods. A cost center is a function within an organisation that does not directly add to profit but still costs money to operate, such as the accounting, HR or IT departments. The manager for a cost center is responsible for keeping costs in line with budget and does not bear any responsibility regarding revenue or investment decisions.

Cost centers are typical business units that incur costs but only indirectly contribute to revenue generation. For example, consider a company's legal department,accounting department, research and development, marketing and customer service a cost center. Cost center in SAP is a location where the costs are incurred inside the organisation. In SAP, cost center is the lowest organisational unit in controlling enterprise structure.