Cost, Profit, and Investment Centers Essay

This is part of a business unit that has individual accountability for the total costs that it incurs. It should be understood that the manager of a cost center is not responsible for any revenue generation or the use of an asset. A cost center's performance is always evaluated by comparing the costs budgeted for and the actual costs incurred. These costs incurred may be aggregated into a pool of costs after which they are allocated to other units of the business in a situation where the cost center is performing services for the other business units.

Is your time best spent reading someone else’s essay? Get a 100% original essay FROM A CERTIFIED WRITER!

Save 25%

In looking at cost center accounting in Germany and how it differs from other companies, it is true that German center accounting is limited in its services as compared to the ones used in other companies. Firstly in analyzing the cost centers, it is evident that for a subunit of any company under German accounting system, then it is necessary that one unit of output measure must be identified for that subunit (Portz & Lere, 2010). This is a different case with my company as well as companies under United States accounting system where the only existing condition is that the decisions made by the cost center head department are the ones that impact the cost. Additionally, in analyzing the cost centers in Germany and other companies, it is worth noting that the cost centers in German accounting system are relatively small as compared to the cost centers in our company which is more substantial. One of the most critical issues pertaining the responsibility of a cost center manager is that in the German system, the primary responsibility of a cost center manager is ensuring that costs adjust in line with the changes in output. While in other companies, the manager's responsibility is broader and controls all the costs within the cost center (Portz & Lere, 2010). This the reason as to why the German system is likely to have the much-improved responsiveness of costs to changes in the output of the cost center.

Classification of costs in a cost center is another aspect of cost that distinguishes German accounting system and other companies. In the German system, costs are classified as fixed costs and proportional cost. In other companies including United States accounting system, the costs are traditionally classified into either fixed costs or variable costs. The latter is used to mean a general term for the costs whose overall change in proportion to the change in some activity measure or output. The last part of the cost is the comparison of output or activity measures (Zimmerman, 2015). In the German system, a single measure of output that represents the cost center as opposed to the firm's output relates to the resources used by the cost center while in our company, several measures are common and in most cases show a different element of the costs of the center.

In as much as the accounting practices of a country is defined by several factors including education and elements of culture, the German system provides a unique and desirable system. This is because a company operating under German accounting system will, for example, have many cost centers than other companies like the ones under United States traditional accounting practices (Collier, 2015). The many numbers allow room for a maximum and accurate view of the cost. Moreover, the measures that are used in the German system are intentioned to relate how resources are used and also to represent the output of the cost center and not the whole firm as in the case of United States system and other companies.

It is important to note that a profit center incurs costs and generates revenues too. Individual departments within a business, for example, branches in our bank are classified as profit centers. The evaluation is done depending on the profitability of the departments which is done by comparing the accounting budget of a given department against the profits realized by that department (Collier, 2015). This is how managers of such departments are also evaluated. In this case, the transfers between different company units alongside the allocation of other overhead costs are put into consideration. This is important for the success of the company in that the management will be able to know how much profit has been realized in a given department and in any case any adjustment is required.

Conclusion

An investment center is where the manager of the department has authority and control regarding the assets that are available. Additionally, the managers are responsible for the rate of return on the assets so invested besides being held accountable for the profits accumulated. Examples of investment center can be a branch of a large corporation. To evaluate the managers in an investment center, the accounting net income, residual income, and return on investment of that center are considered (Zimmerman, 2015). This element contributes to the success of the organization in the sense that the company can compare various investments it made with the returns that they yielded. This will inform the course of the organization whether or not to pursue that investment line or not.

References

Collier, P. M. (2015). Accounting for managers: Interpreting accounting information for decision making. John Wiley & Sons.

Portz, K., & Lere, J. C. (2010). Cost center practices in Germany and the United States: impact of country differences on managerial accounting practices. American Journal of Business, 25(1), 45-52.

Zimmerman, J. L. (2015). The role of accounting in the twenty-first-century firm. Accounting and Business Research, 45(4), 485-509.