Introduction
Managerial accounting provides an extensive and continuous flow of information focused on evaluating concepts such as cost center and profit center. Presently, modern day production procedures encounter a myriad of challenges such as aggressive competition among major market players and the urge to double production at abridged cost. Hence, the cost center comes into play ensuring everything pertaining price is under control. Price and authority are two elements that influence resource distribution. This essay will carry out an in-depth analysis on cost, investment, and profit centers and the contrast among the three.
Cost center
In simple terms, cost center is a section in a company that affects the profits indirectly. It adds onto a firm’s operation expenses (Suominen, & Lee, 2015). Via operation efficiency and customer service area, cost centers affect profitability of a business. Cost centers assist directors in utilizing resources wisely by availing insight into effective ways of using limited resources.
The main goal of a cost center is monitoring a firm’s expenses hence it does not influence decision-making but later can detect any misuse (Suominen, & Lee, 2015). More so, dividing expenses into small sections helps for better management and control over resources. In the end, one is able to predict accurately on the expenses and thus better use of finances.
Profit center
It is a section within a firm that directly affects the profit margins of a company. In other words, it generates earnings based on independent factors associated with it (Clark, Lusardi, & Mitchell, 2017). The profit center allows directors to make decisions based on an item’s price and operating costs. Profit centers influence sales and the determinants that dictate a profit or a loss.
Profit centers draw the line between a loss and a win. This distinction allows for accurate evaluation and comparison. Therefore, after the study and evaluation of profit centers, managers can tell the most resourceful sections and decide on necessary actions to take on unprofitable sections (Clark, Lusardi, & Mitchell, 2017). It is vital to note that not all department are profit centers. For example, sections that gives necessary services to a business, which do incur profit.
Investment center
A section either generates profit or incurs operational costs. In the case of investment center, it handles its own revenues, assets, and running expenditures (Clark, Lusardi, & Mitchell, 2017). Therefore, it is self-sustaining. More so, the department’s tasks are unique to it. In other words, it is a subsection of a firm. Thus, it is a like an extended version of an organization or firm. It is vital to note that it can bring in profit or measure expenditure.
Multi-hospital company examples
Examples of costs centers in multi hospital organizations are the accounting sections. An accounting department audits a multi hospital’s expenditure and weighs on its losses. The auditing department itself does not generate any profit for the hospital but its services are essential for running the day-to-day operations of the hospital (Clark, Lusardi, & Mitchell, 2017). On the other hand, the services offered can be profit centers as they are part of the sales sections. A client pays in order to get service from the institution. The library and IT sections can be part of the investment department due to their self-sustaining nature.
In short, a profit center is a department with the ability to create revenue against its expenditure consequently has effects on the overall profit margins. In the other hand, a cost center can incur expenses but not bring in profit from its expenditure. Lastly, an investment center out sources its funds and acts as an extension to the organization.
References
Clark, R., Lusardi, A., & Mitchell, O. S. (2017). Financial knowledge and 401 (k) investment performance: a case study. Journal of Pension Economics & Finance, 16(3), 324-347.
Suominen, K., & Lee, J. (2015). Bridging Trade Finance Gaps. Brookings Institution, January.
