Quality Metal Service Essay

An overview of cost, profit, revenue, and investment centers Cost classification in accounting also involves the allocation of costs, revenues and responsibilities to various centres or departments. These centres include: == Cost centres == Revenue centres == Profit centres == Investment centres Cost Centres A cost centre (CC) is a unit, location or department where cost data is collected. The purpose of the cost centre is to collect, analyze and ascertain costs in its immediate context. Cost centres usually have cost units—units or equipment for which costs are determinable or attributable. Overheads and direct costs constitute the cost structure of a CC. Since many activities in an organisation involve costs, a cost centre is a fundamental aspect, especially as profit and investment centres can be cost centres. According to the ACCA Study Text (Management accounting, c 1999), cost centres can manifest themselves as a project, a machine, department or overhead costs. One should note that a specific cost centre might not necessarily have other functions. CCs are not limited to production and manufacturing, since they can also be attributed to service centres, like commercial bank branches for example. Revenue Centres These centres deal exclusively with revenue. Even though costs may arise from these areas, the revenue centre is not accountable for costs. Its purpose is primarily to maximise sales and revenue. Profit centre The profit centre addresses both costs and revenue. Therefore, the manager responsible for a profit centre is accountable for the purchases and sales for that unit, department or branch. Since both revenue and costs fall under the purview of the profit centre, it is both a cost and revenue centre, although a revenue centre is not a profit centre and a cost centre might not necessarily be a profit centre. Investment centres Investment centres are profit centres that are accountable for cost, revenues and net assets for capital investment. This unit is assessed by return on investment and is a cost centre. Managers in an investment centre are responsible for purchasing capital or non-current assets and making investment decisions with capital. Investment centres Investment centres are profit centres that are accountable for cost, revenues and net assets for capital investment. This unit is assessed by return on investment and is a cost centre. Managers in an investment centre are responsible for purchasing capital or non-current assets and making investment decisions with capital. Responsibility centres are the umbrella term for cost, profit, revenue and investment centres, since their performance is under the direct control of a manager. The cost centre concept is present in profit and investment centres. The profit centre can be stand alone or, with additional responsibilities, an investment centre. Revenue centres operate in a similar manner to cost and profit centres, but their managers are primarily responsible for maximizing revenues and sales. An accountant needs to know the different types of centres to understand the information needs and requirements of the managers of the various units. Responsibility Centres A responsibility centre is an organizational subsystem charged with a well-defined mission and headed by a manager accountable for the performance of the centre. â€Å"Responsibility centres constitute the primary building blocks for management control.† It is also the fundamental unit of analysis of a budget control system. Aresponsibility centre is an organization unit headed by a responsible manager. There are four major types of responsibility centres: cost centres,revenues centres, profit centres and investment centres. Cost Centre A cost centre is a responsibility centre in which manager is held responsible for controlling cost inputs. There are two general types of cost centres: engineered expense centres and discretionary expense centres. Engineered costs are usually expressed as standard costs. A discretionary expense centre is a responsibility centre whose budgetary performance is based on achieving its goals by operating within predetermined expense constraints set through managerial judgement or discretion. Revenue Centre A revenue centre is a responsibility centre whose budgetary performance is measured primarily by its ability to generate a specified level of revenue. Profit Centre In a profit centre, the budget measures the difference between revenues and costs. Investment Centre An investment centre is a responsibility centre whose budgetary performance is based on return on investment. The uses of responsibility centres depend to a great extent on the type of organization structure involved. Engineered cost centres, discretionary expense centre, and revenue centres are more often used with functional organization designs and with the function units in a matrix design. In contrast, with a divisional organization designs, it is possible use profit centres because the large divisions in such a structure usually have control over both the expenses and the revenues associated with profits.