Question

Clearly define Cost Centres , revenue center , investment centers and others.
i read on book but i can't able to imagine a suitable example so the concept sen on my mind . so, please illustrate all the responsibility centres with very nice examples like it sets in my ming upon single reading. And I hope you would do so in brief .

Answer 1

Before understanding these terms, let's go back to the root.

An organization may be categorized into two types of structures - Functional organization structure and Divisional organization structure. Function structure is formed when an organization departmentalizes according to the basic business functions such as accounts and finance, marketing, production, HR, etc. Contrastingly, an organization may divide itself based on various divisions (aka responsibility centers) which may perform a group of functions rather than a single function. There are four categories of responsibility centers as follows:-

1. Cost Centres:- In this type of division, the manager is responsible for the cost associated with that center. He is not obliged to generate revenue or profit for the organization. A research and development center is generally seen as a cost center as it could be expected to reduce costs but not to generate any kind of revenue.

2. Revenue Centres:- In this kind of division, the manager is primarily responsible for generating revenue for the organization. A marketing division could be seen as a revenue center as it is directly associated with revenue generation. Similarly, there could be geographical sales divisions that are responsible merely for increasing sales. The decision w.r.t. procurement or other cost is not taken by these divisions.

3. Profit Centres:- These divisions can take decisions w.r.t. both the revenue generation and cost management as well. A sales department is a perfect example of a profit-center as it incurs costs as well as generates revenue for the entity.

4. Investment Centres:- These are divisions where the manager is responsible not just for revenue and cost but also for the resources required for the generation of such cost and revenue. Such kind of divisions is obliged with making investment decisions in addition to others. A strategic business unit that is operating independently is responsible for managing assets, generating revenue and also for cost management. Suppose a company wants to start a new business without incorporating a subsidiary company, it would go for opening an investment center. This kind of division is seen in an organization dealing in a multi-product business line.