Cost centres, profit centres, investment centres and revenue centres
Responsibility accounting is based on identifying individual parts of a business which are the responsibility of a single manager.
A responsibility centre is an individual part of a business whose manager has personal responsibility for its performance. The main responsibility centres are:
• cost centre
• profit centre
• investment centre
• revenue centre.
A cost centre is a production or service location, function, activity or item of equipment whose costs are identified and recorded.
• For a paint manufacturer cost centres might be: mixing department; packaging department; administration; or selling and marketing departments.
• For an accountancy firm, the cost centres might be: audit; taxation; accountancy; word processing; administration; canteen. Alternatively, they might be the various geographical locations, e.g. the London office, the Cardiff office, the Plymouth office.
A revenue centre is a part of the organisation that earns sales revenue. It is similar to a cost centre, but only accountable for revenues, and not costs.
Managers of investment centres are responsible for investment decisions as well as decisions affecting costs and revenues.
• Investment centre managers are therefore accountable for the performance of capital employed as well as profits (costs and revenues).
• The performance of investment centres is measured in terms of the profit earned relative to the capital invested (employed). This is known as the return on capital employed (ROCE).
• ROCE = Profit/Capital employed.
Financial accounting involves recording the financial transactions of an organisation and summarising them in periodic financial statements for external users who wish to analyse and interpret the financial position of the organisation.
• The main duties of the financial...
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