Question

1. Distinguish among a cost center, a profit center, and an investment center. Provide an example of each for a multi-hospital corporation.
2. What are some of the uses that management may make of accounting information about individual responsibility centers of the business?

Answer 1

Difference between a cost center, profit center and an investment center

Cost center has control over the costs, but not on the investment or revenue in the organization. The purpose of cost center is to minimize costs in the organization.

Profit center has control over the cost as well as revenue but not on the investments. The profit center is calculated by comparing actual profit to targeted or budgeted profit.

Investment center has control over the cost, revenue as well as investment in the operating assets of the organization. The investment center is evaluated by the residual income and return on investment measures.

Examples of Responsibility centers:-

For a multi hospital corporation, the hospital and its clinics are considered investment centers as well us profit centers because the managers of each clinic and the hospital have . decision-making responsibility for profit center-related decisions.And a typical cost center is the janitorial department.

Responsibility center

A responsibility center is a functional entity within a business that has its own goals and objectives, dedicated staff, policies and procedures, and financial reports. It is used to give managers specific responsibility for revenues generated, expenses incurred, and/or funds invested. This allows the senior managers of a company to trace all financial activities and results of a business back to specific employees. Doing so preserves accountability, and may also be used to calculate bonus payments for employees. A responsibility center may be one of four types, which are:

• Revenue center :This group is solely responsible for generating sales. A typical revenue center is the sales Department.
• Cost center : This group is solely responsible for the incurrence of certain costs.
• Profit center : This group is responsible for both revenues and expenses, which result in profits and losses. A typical profit center is a product line, for which a product manager is responsible.
• Investment center : This group is responsible not only for profits, but also for the return on funds invested in the group's operations. A typical investment center is a subsidiary entity, for which the subsidiary's president is responsible.