Cost center
A cost center is a place where specific costs can be traced to. The person in charge of a cost center runs deals with costs only. For example, a machine in a manufacturing plant is a cost center because it needs fuel and servicing to run smoothly, all of which are costs. Other examples of cost centers include departments, divisions, subsidiaries and plants for manufacturing companies.
Profit center
In a profit center, costs as well as revenues are identified. The head of a profit center takes responsibility for costs and revenues from that particular center. Revenues can be either from sales outside the organization or to other departments in the organization. The sales department is a good example of a revenue center. The manager or head of department runs both cost and revenue activities. Another example of a revenue center is a subsidiary. In a subsidiary business is carried out as usual bringing in revenues to the company.
Investment center
Investment center is a place where costs, revenues and capital expenditure can be identified. Examples include a subsidiary and a division. The manager of an investment center has authority over determination of costs, tracking over revenues and decisions on capital expenditures.
Responsibility center
All the examples given in the three centers above are a representative of a responsibility center. A responsibility center is a subunit in a company headed by a manager who has authority over the operations in that center. It can be a department or division.
Evaluation of responsibility centers
As a manager, my criteria for evaluating a responsibility center will include the nature of the activities in the center, performance indicators as well as the importance of the center in the business of the company.
