In a decentralized organization, upper managers need a way to evaluate the perfo
ID: 2454822 • Letter: I
Question
In a decentralized organization, upper managers need a way to evaluate the performance of unit managers. Based on factors under the unit manager’s control, organizational units are categorized as . Classify each of the following centers by placing an “X” in the appropriate column. Also feel free to add explanations.
Cost
Profit
Investment
1. Manager is responsible for revenues and costs
2. Payroll department
3. Customer service department
4. Independently operated division with sole decision-making authority for all areas
5. Electronics department in a Best-Buy store
Cost
Profit
Investment
1. Manager is responsible for revenues and costs
2. Payroll department
3. Customer service department
4. Independently operated division with sole decision-making authority for all areas
5. Electronics department in a Best-Buy store
Explanation / Answer
Profit center are units of the organisation which are responsible for its revenue and cost and are thus accounted seperately. Managers have descretion to decide over product's pricing and operating expenses.
Cost centre adds to the cost of the organisation running cost. Such center do not contribute directly towards the profitability of the company as opposed to the profit center.
Investment center utilizes return on investment metric to evaluate it's business performance. Business unit that uses capital to contribute to company's profitability. The investment center concept is most useful in situations where there is a large investment by a business unit in fixed assets and/or working capital.
Based on above the classification has been made as under:
Particulars
Cost
Profit
1. Manager is responsible for revenues and costs
X
2. Payroll department
X
3. Customer service department
X
4. Independently operated division with sole decision-making authority for all areas
X
5. Electronics department in a Best-Buy store - Investment Center
Particulars
Cost
Profit
1. Manager is responsible for revenues and costs
X
2. Payroll department
X
3. Customer service department
X
4. Independently operated division with sole decision-making authority for all areas
X
5. Electronics department in a Best-Buy store - Investment Center