Cost center

Research and Development

Question 1

Cost center

It is also referred to as an expense center and it can be termed as a place where a manager is responsible to only the costs that he or she can control. Costs that are likely to be incurred are laid down before budgeting (Weygandt, 2015). They are divided into two groups which are where the results to be produced are measured and materials that will be required to produce those results can be identified (standard cost center). The other group is where desired results cannot be easily identified thus materials required to produce are not easy to specify (discretionary cost center).

An example of standard cost center in human resource is staff development where the required output will be professionalism and training will be the “material” needed to produce professionals. An example of discretionary cost center is the health and safety unit in an organization. The manager is therefore responsible for all the input costs incurred in an organization. Performance of the manager can be evaluated by comparison of their actual performance to that indicated in the budget (Edmonds, 2016).

Revenue center

It’s a point of responsibility where the manager is answerable to the amount of revenue generated under his control and nothing else (Edmonds, 2016). An example is in the marketing department which may have a team targeting a certain area. Here, the sales manager will be responsible and must ensure that the set targets are met by his team so as to generate the required revenue. Assessing of the revenue manager will be through comparison of actual performance to that budgeted in sense of price, mix and volume.

Profit center

It’s the combination of the cost and revenue centers in which the manager is responsible for both production and revenue generation (Edmonds, 2016). He or she is responsible for planning the production, making decisions on prices, product mix and purchase of materials. Assessment of the manager can be done by looking into the costs involved in comparison to the revenue and total profit gained. An example of a profit center is the stores or sales departments which aim to have more returns.

Investment center

The manager is given more work which involves making of decisions relating to investments that an organization wants to venture in for example during purchase of fixed assets or development of existing investment (DRURY, 2013). Assessment of the manager can be done by comparison of the profits generated by the assets invested in with those obtained before the investment was undertaken. Example include human resource department where training can be termed as an investment since more production and profits are met.

Question 6

Using the Returns on Investment, I would not have invested in the opportunity as it was much lower by one percent to the current lumber investment. Using residual income, I would have invested in it residual income is used in measuring performance for a department in an organization. It determines the revenue generated in excess of the revenues aimed by the function. Investing in the 16% investment means the company will have an excess of 1% over the minimum rate required of 15%.

References

DRURY, C. M. (2013). Management and cost accounting. Springer.

Edmonds, T. P., Edmonds, C. D., Tsay, B. Y., & Olds, P. R. (2016). Fundamental managerial accounting concepts. McGraw-Hill Education.

Weygandt, J. J., Kimmel, P. D., & Kieso, D. E. (2015). Financial & managerial accounting. John Wiley & Sons.

 

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