Cost centres, profit centres, investment centres and revenue

centres
Responsibility accounting
Responsibility accounting is based on identifying individual parts of
a
business which are the responsibility of a single manager.
A responsibility centre is an individual part of a business whose
manager
has personal responsibility for its performance. The main
responsibility
centres are:

• cost centre
• profit centre
• investment centre
• revenue centre.
\
Cost centres
A cost centre is a production or service location, function, activity or item of
equipment whose costs are identified and recorded.
• For a paint manufacturer cost centres might be: mixing department;
packaging department; administration; or selling and marketing
departments.
• For an accountancy firm, the cost centres might be: audit; taxation;
accountancy; word processing; administration; canteen. Alternatively,
they might be the various geographical locations, e.g. the London
office, the Cardiff office, the Plymouth office.

Revenue centre
A revenue centre is a part of the organisation that earns sales revenue. It
is similar to a cost centre, but only accountable for revenues, and not costs.

Investment centres
Managers of investment centres are responsible for investment decisions
as well as decisions affecting costs and revenues.
• Investment centre managers are therefore accountable for the
performance of capital employed as well as profits (costs and
revenues).
• The performance of investment centres is measured in terms of the
profit earned relative to the capital invested (employed). This is known
as the return on capital employed (ROCE).
• ROCE = Profit/Capital employed.
Financial accounting
Financial accounting involves recording the financial transactions of an
organisation and summarising them in periodic financial statements for
external users who wish to analyse and interpret the financial position of
the
organisation.
• The main duties of the financial accountant include: maintaining the
bookkeeping system of the nominal ledger, payables control account,
receivables control account and so on and to prepare financial
statements as required by law and accounting standards.

Cost accounting
Cost accounting is a system for recording data and producing information
about costs for the products produced by an organisation and/or the
services it provides. It is also used to establish costs for particular
activities
or responsibility centres.
• Cost accounting involves a careful evaluation of the resources used
within the enterprise.

Management accounting has cost accounting at its essential foundation.

The main differences between management accounting and cost
accounting are as follows:
• Cost accounting is mainly concerned with establishing the historical
cost of a product/service.
• Management accounting is concerned with historical information but it
is also forwardlooking.
It is concerned with both historical and future
costs of products/services. (For example, budgets and forecasts).
• Management accounting is also concerned with providing nonfinancial
information to managers.
• Management accounting is essentially concerned with offering advice
to management based upon information collected (management
information).
• Management accounting may include involvement in planning, decision
making and control.

The following illustration compares management accounting with financial

accounting.
Management
accounting
Financial accounting
Information
mainly
produced for
Internal use: e.g.
managers and
employees
External use: e.g.
shareholders, creditors,
lenders, banks, government.
Purpose of
information
To aid planning,
controlling and
decision making
To record the financial
performance in a period and
the financial position at the
end of that period.
Legal requirements
None Limited companies must produce financial accounts.
Formats Management
decide on the
information they
require and the
most useful way of
presenting it
Format and content of
financial accounts intending to
give a true and fair view
should follow accounting
standards and company law.
Nature of
information
Financial and nonfinancial.
Mostly financial.
Time period Historical and
forwardlooking.
Mainly an historical record.
chapter 1

Information
mainly
produced forInternal use: e.g.managers and
employees
External use: e.g.
shareholders, creditors,
lenders, banks, government.KAPLAN