A company has a management hierarchy in place to oversee different aspects of the business. Ultimately, the chief executive or president is responsible for the success and failure of a company. He delegates responsibilities to his subordinates who in turn delegate to others. Of course, depending on the size of the company, there could be few to several on each management level.
Management accounting systems function to measure and report the performance of managers at all levels in terms of revenues and costs. Each management department is considered a separate accounting unit. The manager for that department is in charge of controlling the revenues and costs associated with his division.
An Overview of Cost, Profit and Investment Centers
- Cost Centers: Some managers can control particular costs but cannot influence revenues in their division. In this case, the costs they can control are designated to their cost centers.
- Profit Centers: Some managers have control over both costs and revenue like a retail store manager. These accounting units are known as profit centers.
- Investment Centers: These accounting units describe managers in large corporations who are responsible for costs, revenues and capital investment.
Although a manager may delegate responsibilities to his subordinates, still he is ultimately responsible for his division. Therefore, the accounting unit for every manager also incorporates the accounting units for all his subordinates. Each accounting unit is designed to serve a specific purpose. Yet, profit and investment centers can also serve other purposes such as to monitor a product line or the performance of managers.