Investment Center

Profit centers, by definition, are really not quite like independent firms. Profit centers do not incorporate allocation of invested capital and appropriate cost of such capital. Where the profit-center concept for control purposes is extended to include such items, the result is known as an investment center. Investment centers may be thought of as profit centers with the addition of an asset base. Investment center is the ultimate extension of the responsibility idea. It is a center in which the head of the center is held responsible for the use of the assets as well as revenues and expenses. In other words, he is expected to earn a satisfactory return on the assets employed in his responsibility center. However, the selection of the appropriate asset base can present difficulties.

Three fundamental questions must be resolved in arriving at an asset base appropriate for a particular investment center:

  1. Which assets should be included? (directly identifiable a-monetary assets or productive assets)
  2. How should the assets selected be measured? (book value or replacement cost or original cost)
  3. Should the base be assets or net assets? (owner’s investment assets employed)

Essentially, the issued of whom assets should be included involves the choice between all assets directly and indirectly involved in the investment center’s activities and only these productive assets that are currently in use. Firms that establish investment enters for control purposes rarely decentralize the management of cash, receivables and marketable securities. Also, certain fixed capacity assets may be commonly or jointly used with other investment centers, and therefore, not really be controllable.

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