Cost Centers, Profit Centers & Investment Centers - Study.com

A cost center is a business unit that incurs expenses or costs but doesn't generate any revenue. 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Inbusiness,therearemanydepartmentswiththeirownspecificpurposes.Distinguishbetweencostcenters,profitcenters,andinvestmentcentersbylearningtheirrolesincostincurrenceandrevenuegeneration. Updated:01/11/2022 Createanaccount DifferentCentersMaxjustlandedhisfirstjobatMNBooks.Duringhisfirstdepartmentmeeting,hismanagerdiscussescostcenters,profitcenters,andinvestmentcenters.Maxrememberslearningaboutthesetermsinhiscollegeaccountingcourse,buthedoesn'trememberthedifferencebetweenthem.Let'sseeifwecanhelpMaxwiththisproblem. Anerroroccurredtryingtoloadthisvideo. Tryrefreshingthepage,orcontactcustomersupport. YoumustcCreateanaccounttocontinue watching Registertoviewthislesson Areyouastudentorateacher? Iamastudent Iamateacher CreateYourAccountToContinueWatching Asamember,you'llalsogetunlimitedaccesstoover84,000 lessonsinmath,English,science,history,andmore.Plus,getpracticetests,quizzes,andpersonalizedcoachingtohelpyou succeed. Getunlimitedaccesstoover84,000lessons. Tryitnow Itonlytakesafewminutestosetupandyoucancancelanytime. Alreadyregistered?Loginherefor access  Back WhatteachersaresayingaboutStudy.com Tryitnow Alreadyregistered? Loginhereforaccess Comingupnext: WhatIsCapitalBudgeting?-Techniques,Analysis&Examples You'reonaroll.Keepupthegoodwork! TakeQuiz Watch NextLesson  Replay Justcheckingin.Areyoustillwatching? Yes!Keepplaying. Yournextlessonwillplayin 10seconds 0:04DifferentCenters 0:24CostCenter 1:15ProfitCenter 1:49InvestmentCenter 3:07LessonSummary Save Save Save Wanttowatchthisagainlater? LoginorsignuptoaddthislessontoaCustomCourse. LoginorSignup Timeline Autoplay Autoplay Speed Speed 26Kviews Video Quiz Course 26K views CostCenterManagersmakedecisionseverydaythataffectthecompany'soperations.Inanidealsituation,Max'smanagerwouldbeevaluatedonherperformancebasedonfactorsthatshecancontrol,suchascost.Acostcenterisabusinessunitthatincursexpensesorcostsbutdoesn'tgenerateanyrevenue.Rememberthatrevenueismoneyfromsellinggoodsandservicesforthecompany.Examplesofcostcentersincludeaccounting,humanresource,andITdepartments.InMax'scompany,theaccountingdepartmentprovidesservicessuchasthemonthlyreportingandtheannualbudgetsthatitpreparestootherdepartmentswithinthecompany.Itincurscoststoproducethesedeliverables,butitdoesnotgenerateanyrevenuebyprovidingthemtootherdepartments.Themanageroftheaccountingdepartmentwouldbeevaluatedonherabilitytocontrolcostsincurredbyherdepartment.ProfitCenterAprofitcenterisadepartmentthatincurscostsbutalsoearnsrevenuebysellingitsgoodsandservicestocustomers.Managersofprofitcentersareevaluatedontheirabilitytocontrolcostsaswelltheirabilitytogeneraterevenueandprofits,whicharerevenuesminusexpenses,intheirdepartments.InMax'scompany,therearemanydivisions,includingfiction,non-fiction,andchildren'sbooks.Eachofthesedepartmentswouldbeaprofitcenter,aseachoneincurscostsandearnsrevenueandprofitfromsellingitsbookstocustomersofthebookstore.InvestmentCenterAninvestmentcenteralsoincurscostsandearnsrevenue,butthemanagerofaninvestmentcenteralsohascontrolovertheinvestmentsthatitmakestoearnprofitsforitsdepartmentordivision.Forexample,MNBookshasadiscountdivisionandadivisionthatsellstextbookstoschools.Themanagersofthesedivisionshavecontroloftheassets,whichareitemsofvaluethatabusinessowns,thatthedivisionpurchasestohelpitgeneraterevenue. Let'sassumethatthediscountdivisionofMNBooksdecidestoopenanotherlocationinadifferentcitytomeetconsumerdemand.Themanagerofthediscountbookdivisionhascontrolorinfluenceoverthisdecision.Sincethemanagerhasmorecontrol,sheisevaluatedonherabilitytocontrolcostsandgeneraterevenueandearnprofitforherdivision,aswellastherateofreturn,whichisthepercentageofmoneymadeorlostonthedecisionshemadetoinvestinexpansion.Therateofreturnisusuallycomparedtoatargetreturnoninvestmentsetbythecompany.Let'sassumethatthediscountdivisionexpandedintoasecondcity,andtheactualrateofreturnontheexpansionwas15%.Ifthecompany'stargetreturnoninvestmentwas12%fortheexpansion,thenwewouldconcludethatthemanagerofthediscountdivisionmanagedtheexpansionwell.LessonSummaryLet'sbrieflyrecapwhatwe'velearnedaboutcostcenters,profitcenters,andinvestmentcenters.Businessesconsistofanumberofdifferentdepartments,andthecompanyshouldevaluatethemanagersofeachdepartmentbasedonthefactorsthattheycancontrol.Acostcenterincurscostsbutdoesnotgeneraterevenue.Revenueincludesearningsfromsellingproductsandservices.Costcenters,suchashumanresourceandaccountingdepartments,providetheirservicestomanydifferentdepartmentswithinthecompanybuttheydonotreceiveanyrevenuefromdoingso.Aprofitcenterincurscostsandearnsrevenuebysellingitsgoodsandservicestocustomers.Managersareevaluatedontheirsuccessincontrollingcostsandhowwelltheygeneraterevenueandprofits.Profitscanbedeterminedbysubtractingexpensesfromrevenuesfortheirdepartmentordivision.Likeaprofitcenter,aninvestmentcenterincurscostsandearnsrevenue,butitalsocontrolstheamountandtypeofinvestmentsitmakesinordertoearnprofits.Managerscandecidewhichassetsoritemsofvalueownedbythebusinessthatitneedstopurchasetogenerateadditionalrevenuesandearnprofits.Themanagerofaninvestmentcenterisevaluatedonhisorherabilitytocontrolcosts,generaterevenue,andproducearateofreturn,orthepercentagegainedorlostoninvestingintheadditionalassets. TounlockthislessonyoumustbeaStudy.comMember. Createyouraccount Registertoviewthislesson Areyouastudentorateacher? Iamastudent Iamateacher UnlockYourEducation Seeforyourselfwhy30millionpeopleuseStudy.com BecomeaStudy.commemberandstartlearningnow. BecomeaMember Alreadyamember?LogIn  Back WhatteachersaresayingaboutStudy.com Tryitnow Alreadyregistered? Loginhereforaccess Createanaccount CostCenters,ProfitCenters&InvestmentCenters Starttoday.Tryitnow Business / TECEPPrinciplesofManagerialAccounting:StudyGuide&TestPrep TECEPPrinciplesofManagerialAccounting:StudyGuide&TestPrep 17chapters| 140lessons |15 flashcardsets {{courseNav.course.topics.length}}chapters| {{courseNav.course.mDynamicIntFields.lessonCount}}lessons |{{course.flashcardSetCount}} flashcardset{{course.flashcardSetCoun>1?'s':''}} Ch1. OverviewofStatementofCash... Goto OverviewofStatementofCashFlows Ch2. FinancialStatementAnalysis... Goto FinancialStatementAnalysisBasics Ch3. RatioAnalysisinAccounting Goto RatioAnalysisinAccounting Ch4. PerformanceMeasurementin... Goto PerformanceMeasurementinAccounting Ch5. CurrencyConversion Goto CurrencyConversion Ch6. CostClassificationsOverview Goto CostClassificationsOverview Ch7. JobOrderCostSystemOverview Goto JobOrderCostSystemOverview Ch8. StandardCostsOverview Goto StandardCostsOverview Ch9. ProcessCostSystemOverview Goto ProcessCostSystemOverview Ch10. Activity-BasedCostingBasics Goto Activity-BasedCostingBasics Ch11. UnderstandingCost-Volume-Profit... Goto UnderstandingCost-Volume-ProfitAnalysis Ch12. ValueChainManagement Goto ValueChainManagement Ch13. Management&Decision-Makingin... Goto Management&Decision-MakinginAccounting Ch14. BudgetingBasics Goto BudgetingBasics Ch15. ResponsibilityCenters&BudgetControls BudgetControls:Top-Down,Bottom-Up,Zero-Based&FlexibleBudgeting 10:10 VariancesinBudgets:Definition,Calculations&Analysis 3:32 FlexibleBudgeting:Advantages&Explanation 3:14 HowtoCompleteaFlexibleBudgetPerformanceReport 3:18 ResponsibilityAccounting:Benefits&Limitations 3:31 CreatingaResponsibilityReportforaCostCenter 3:11 InvestmentCenterEvaluation:Formula&ResidualIncome 4:44 CostCenters,ProfitCenters&InvestmentCenters 4:32 Goto ResponsibilityCenters&BudgetControls Ch16. UnderstandingCapitalBudgeting Goto UnderstandingCapitalBudgeting Ch17. TECEPPrinciplesofManagerial... 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EachofthefollowingHolidayInnemployeeshasbeengivencertaindecision-makingauthority.Classifyeachmanager'sdepartmentaccordingtothetypeofresponsibilitycenterheorshemanages:Cost Asegmentofanorganizationisreferredtoasacostcenterifithas:A.responsibilityfordevelopingmarketsforandsellingoftheoutput.B.authoritytomakedecisionsaffectingthemajordet AservicedepartmentisusuallyevaluatedasaprofitcenterTRUEorFALSE Fillintheblankswiththephrasethatbestcompletesthesentence.Somephrasesmaybeusedmorethanonceandsomenotatall.Themaintenancedepartmentatthelocalzooisa(n)_____Theconcess MekoEnterprisesoperatesfourdivisions:D1,D2,D3,andD4.Thesales,costofgoodssold,andothercostsfor2015operatingperiodforthedivisionsandregionsareasshownbelow.D1(NorthJers Createanaccounttostartthiscoursetoday Usedbyover30millionstudentsworldwide Createanaccount Likethislesson Share Exploreourlibraryofover84,000 lessons Search Browse Browsebysubject CollegeCourses Business English ForeignLanguage History Humanities Math Science SocialScience SeeAllCollegeCourses HighSchoolCourses AP CommonCore GED HighSchool SeeAllHighSchoolCourses OtherCourses College&CareerGuidanceCourses CollegePlacementExams EntranceExams GeneralTestPrep K-8Courses SkillsCourses TeacherCertificationExams SeeAllOtherCourses Upgradetoenroll × Enrollinginacourseletsyouearnprogressbypassingquizzesandexams. 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