Cost Centre
A cost centre or expense centre can be defined as a responsibility centre where a manager is accountable only for costs which are under his control. It is a production or service location for which costs can be identified or accumulated prior to allocation to cost units. Cost centers may be either standard cost centers, where output can be measured and the input needed for a given output can be specified, or discretionary cost centers, where output cannot be measured easily and the relationship between inputs and outputs cannot be specified. An example of a standard cost centre is a production unit within a factory, while an example of a discretionary cost centre is a health and safety department within a university. A cost centre manager is responsible for the cost of inputs to the organization. The performance of the manager of a cost centre can be assessed by comparing actual performance with budgeted targets for price, usage and efficiency.
Revenue Centre
A revenue centre is a responsibility centre where a manager is accountable solely for the revenue generation that is under his control. An example would be a sales team with a target geographical area which is under the control of a sales manager. The manager would have no responsibility for the production cost of the items his team is selling, but has responsibility for meeting sales targets in terms of sales volume, sales revenue or market share. A revenue centre manager has responsibility for the revenue generated by outputs from the organization. The performance of the manager of a revenue centre can be assessed by comparing actual performance with budgeted targets for price, mix and volume.
Profit Centre
A profit centre is a combination of a cost centre and a revenue centre where a manager has responsibility for both production costs and revenue generation. The degree of responsibility carried by a manager can be higher with a profit centre than with a cost centre or a revenue centre, and the manager may be responsible for purchasing, production planning, product mix and pricing decisions. The performance of the manager of a profit centre is unlikely to be assessed on the fine detail of cost and revenue data but by the extent to which agreed targets for overall cost, revenue and profit have been achieved.
Investment Centre
With an investment centre, the manager of a profit centre is given additional responsibility for investment decisions regarding working capital and the purchase and replacement of fixed assets. The manager of an investment centre is likely to be assessed with an aggregate measure that links periodic profit to the assets employed in the period to generate that profit. An example of such an aggregate measure is return on capital employed.