How Should the Company Classify Each Division, as a Cost Center, Profit Center, or Investment Center?

Chapter 11

11-17

Decentralizing Operations. Burton Electronics produces radios,

computers, and navigation systems. Although all high level

decisions are made at company headquarters by top

management, rapid expansion and increasingly specialized

products have caused the company to consider decentralizing

into three divisions. Each division manager would be responsible

for costs, revenues, and investments in assets.

Required:

a. How should the company classify each division, as a cost

center, profit center, or investment center? Explain.

Radios, Computers, and Navigation Systems would all be classified as investment centers because these are divisions of the business that produce goods and revenues, as well as incur costs, with management being responsible for the investment decisions of assets.

b. What are the potential advantages of decentralizing?

The advantages for decentralization are higher focused areas. Now you have managers only focusing on their division rather than one manager focusing on all products. This means better expertise for the specific products, which can lead to faster decision making. These can also have a better effect on the top executives to focus on long term strategy and focus on the company as a whole in what direction they want to pursue. Top executives can focus on the direction the company is going, rather than focusing in on the day to day operations.

c. What are the potential disadvantages of decentralizing?

There could be duplications of services and additional costs. Many managers may only be focused on their specific department instead of the company as a whole, so their decision making may be more for the benefit of their segment rather than that of the business as a whole.

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Responsibility Centers. Aviation Products, Inc., operates

primarily in the United States and has several segments:

1. Accounting and finance: responsible for recording financial

information and preparing financial reports. – Cost Center – This segment is only responsible for costs, no revenue or investment in assets is being done.

2. Human resources: responsible for hiring employees and

maintaining personnel records. – Cost Center – no revenues or investments occur in this segment.

3. Retail stores: responsible for sales prices and all costs within

each store.  – Profit Center – Responsible for revenue and costs but not investments in assets.

4. Advertising: responsible for promotional materials. – Cost Center – no revenues or investments occur in this segment.