Creating classifications enables the accountability system to function. Accountability is an accounting system that separates revenue and costs into the area of personal responsibility in order to monitor and evaluate the performance of some parts of the organization.
The Responsibility Center is a class or organizational function that is the direct responsibility of performance for a particular leader.
In the weakest form of decentralization, the system of cost centers can be used. As decentralization becomes stronger, the liability clearing framework will be built around profit centers. In the strongest form, they use investment centers.
If a split order of a company allows a certain margin of discretion for the amount of investment contracted, the results are clearly allocated to profit only (such as a profit center). Profit must be linked to the amount of invested capital. Such division is sometimes referred to as an investment center. Performance is determined by the return on return on capital, which is often determined by return on investment and other subsidiary ratios or residual income (RI).
The investment center is a profit center that has additional capital investment and potential funding obligations and which performance is measured by return on investment.
Managers of subsidiaries often invest in investment centers, including profits and capital. Within each subsidiary, the major divisions are to be treated as profit centers where each distinguished icebreaker is entitled to determine the amount of process and output for the products or services of the division. Within each department there are department manager managers, and so on, all of which can be classified as a cost center manager. All Managers should receive regular periodic performance reports for their own area of responsibility.
The amount of capital invested in an investment center must consist only of directly attributable assets and working capital.
o Subsidiaries are often required to involve cash in the central office of the group at the central finance ministry. And so direct working working capital would consist of stocks and less creditors, but a minimum amount of cash.
o If an investment center is subdivided from a part of central office assets, the amount of capital used in these assets is accounted for separately, as this is not directly attractive to the investment center.
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