An investment center is a classification used for business units within an enterprise.

The essential element of an investment center is that it is treated as a unit which is measured against its use of capital, as opposed to a cost or profit center, which are measured against raw costs or profits. The Investment Center takes care of Revenues, Cost and Assets -while Profit Center deal just with revenues and costs and Cost Center with cost only. This is a clear sign of how the span of control and span of accountability grow from Cost Centers to Investment ones. The advantage of this form of measurement is that it tends to be more encompassing, since it accounts for all uses of capital. It is susceptible to manipulation by managers with a short term focus, or by manipulating the hurdle rate used to evaluate divisions.

A profit center is a section of a company treated as a separate business. Thus profits or losses for a profit center are calculated separately A profit center manager is held accountable for both revenues, and costs (expenses), and therefore, profits. What this means in terms of managerial responsibilities is that the manager has to drive the sales revenue generating activities which leads to cash inflows and at the same time control the cost (cash outflows) causing activities. This makes the profit center management more challenging than cost center management. Profit center management is equivalent to running an independent business because a profit center business unit or department is treated as a distinct entity enabling revenues and expenses to be determined and its profitability to be measured. Business organizations may be organized in terms of profit centers where the profit center's revenues and expenses are held separate from the main company's in order to determine their profitability. Usually different profit centers are separated for accounting purposes so that the management can follow how much profit each center makes and compare their relative efficiency and profit. Examples of typical profit centers are a store, a sales organization and a consulting organization whose profitability can be measured. Peter Drucker originally coined the term profit center around 1945. He later recanted, calling it "One of the biggest mistakes I have made." He later asserted that there are only cost centers within a business, and The only profit center is a customer whose cheque hasnt bounced.[1]

A responsibility center is an organization unit that is headed by a manager who is responsible for its activities and results.[1] InResponsibility Accounting revenues and costs information are collected and reported by responsibility centers.[2]
[edit]Description

An organization unit can be considered a responsibility center if it has a manager; it has its own objectives guiding its activities; and * the manager has control over the resources needed to pursue the objectives.[3] A decentralized environment results in highly dispersed decision making. As a result, it is imperative to monitor and judge the effectiveness of each manager. This is easier said than done. Not all

departments (Centers) can be evaluated on the same basis because some do not generate any revenue; they only incur costs in support of some necessary function. Other Centers that deliver goods and services have the potential to be assessed on the basis of profit generation. As a generalization, the part of an organization under the control of a manager is termed a "responsibility center." To aid performance evaluation it is first necessary to consider the specific character of each responsibility center. Some responsibility centers are cost centers and others are profit centers. On a broader scale, some are considered to be investment centers. The logical method of assessment will differ based on the core nature of the responsibility center. basic devices are essential to a well managed organization. Managers must be held accountable for the results of their decisions and related execution. Without performance-related feedback, the business will not perform at its best possible level, and opportunities for improvement may go unnoticed. Given that managers must be held accountable for decisions, actions, and outcomes, it becomes very important to align a manager's area of accountability with their area of responsibility. The "area" of responsibility can be a department, product, plant, territory, division, or some other type of unit or segment. Usually, the attribution of responsibility will mirror the organizational structure of the firm. This is especially true in organizations that have a decentralized approach to decision-making.[4]
[edit]Types

of responsibility centers

There are four types of responsibility centers, according to the nature of the control over the inputs and outputs:[5]

Revenue center Cost or Expense center Profit center center

Investment [edit]

The term profit center usually refers to any component of a company that is designed to generate revenue for the company as a whole. For example, a bank's branch is a profit center while its check processing department is a cost center. The branch earns money while the processing department does not (but is still necessary to the business to function). An SBU (strategic business unit) is nearly like a separate company of a larger parent firm that has a very specific purpose. The car company Saturn is an SBU of General Motors. It was set up basically as its own company--along with its own profit centers. It was designed to serve a different customer segment (small, economy autos) and have different competitors (Japanese economy autos) than the rest of GM autos. Another example of this is the firm General Electric which has several strategic business units, like aircraft engines, financial services, and consumer electronics.

Audit is the task of careful and in detail checking or examining of cost & financial statements from company or organization to make sure that they are correct and complete, or a report that showing the results of this check. Financial Audit is the examination of financial records and business accounts by an independent body which is conducted for compliance, taxation or for disclosure purposes and ensures high accuracy in the given reports. Cost Audit is the verification of accounts and cost records, and a careful compliance to cost accounting process. Difference between Financial Audit and Cost Audit

Financial Audit 1. Financial audit is mandatory for all companies registered under Companies Act, 1956. 2. The financial audit is done to report on the financial data, consisting of a statement of balance sheet and profit and loss to ensure fairness of business perspectives. 3. Financial shareholders. Auditor is appointed by

Cost Audit Only in case of companies involved into manufacture or mining business and required to maintain Cost Accounts as per Section 209. Cost audit is done to certify after careful examination or checking of reports on expenditure made on production of intended items. Cost Auditor is appointed by the board of directors with the previous approval of the Central Government.

4. Financial audit is conducted every year.

mandatory

to

be Cost Audit is conducted in a year in which audit is required by the government.

Cost audit is done when government or 5. Financial audit is done or conducted as per industrial organization proposes to make an the demand of the shareholders. audit. 6. Financial auditor has to check or examine In cost, audit the auditor has to see whether carefully and in detail the exact value of there is sufficient stock maintaining in order closing the stock for the purpose of balance to fulfill the needs of the business concern. sheet. 7. The financial auditors have to give their The cost auditors have to give their remarks remarks about the exact expenditures shown about how correctly or wisely the decisions on the record. have been taken in production of items. 8. The finance auditor submits the report in Cost auditor submits the report to the annual general meeting organized by company and central government within 180 shareholders. days from the end of financial year.

Efficiency Audits An economy and efficiency audit, or simply efficiency audit, focuses on the resources and practices of a program or department, according to the Encyclopedia of Public Administration and Public Policy, which provides descriptions of typical audit activities. An economy and efficiency audit might analyze the procurement, maintenance and implementation of resources, such as equipment, to identify areas that require improvement. Alternately, it might examine the practices of a department or program to find inefficient or wasteful processes. A systematic assessment of methods and policies of an organization's management in the administration and the use of resources, tactical and strategic planning, and employee and organizational improvement. The objectives of a management audit are to (1) establish the current level of effectiveness, (2) suggest improvements, and (3) lay down standards for future performance. Management auditors (employees of the company or independent consultants) do not appraise individual performance, but may critically evaluate the senior executives as a management team. See also performance audit.

Zero-based budgeting is an approach to planning and decision-making which reverses the working process of traditional budgeting. In traditional incremental budgeting, departmental managers justify only variances versus past years, based on the assumption that the "baseline" is automatically approved. By contrast, in zero-based budgeting, every line item of the budget must be approved, rather than only changes.[1] During the review process, no reference is made to the previous level of expenditure. Zero-based budgeting requires the budget request be re-evaluated thoroughly, starting from the zero-base. This process is independent of whether the total budget or specific line items are increasing or decreasing. The term "zero-based budgeting" is sometimes used in personal finance to describe "zero-sum budgeting", the practice of budgeting every dollar of income received, and then adjusting some part of the budget downward for every other part that needs to be adjusted upward.

Zero based budgeting also refers to the identification of a task or tasks and then funding resources to complete the task independent of current resourcing.
Contents

1 Advantages 2 Disadvantages 3 Use in the public sector

o o o o o o

3.1 Background 3.2 Definition 3.3 Components of a public sector ZBB analysis 3.4 Defining the government program zero-base 3.5 Importance of performance measures 3.6 Impact of ZBB on Government Operations

4 See also 5 References

[edit]Advantages

1. Efficient allocation of resources, as it is based on needs and benefits rather than history. 2. Drives managers to find cost effective ways to improve operations. 3. Detects inflated budgets. 4. Increases staff motivation by providing greater initiative and responsibility in decision-making. 5. Increases communication and coordination within the organization. 6. Identifies and eliminates wasteful and obsolete operations. 7. Identifies opportunities for outsourcing. 8. Forces cost centers to identify their mission and their relationship to overall goals. 9. Helps in identifying areas of wasteful expenditure, and if desired, can also be used for suggesting alternative courses of action
[edit]Disadvantages

1. More time-consuming than incremental budgeting. 2. Justifying every line item can be problematic for departments with intangible outputs. 3. Requires specific training, due to increased complexity vs. incremental budgeting. 4. In a large organization, the amount of information backing up the budgeting process may be overwhelming.

Definition Operating cash flows (net income plus amortization and depreciation) minus capital expenditures and dividends. Free cash flow is the amount of cash that a company

has left over after it has paid all of its expenses, including investments. Negative free cash flow is not necessarily an indication of a bad company, however, since many young companies put a lot of their cash into investments, which diminishes their free cash flow. But if a company is spending so much cash, it should have a good reason for doing so and it should be earning a sufficiently high rate of return on its investments. While free cash flow doesn't receive as much media coverage as earnings do, it is considered by some experts to be a better indicator of a company's financial health.
A measure of financial performance calculated as operating cash flow minus capital expenditures. Free cash flow (FCF) represents the cash that a company is able to generate after laying out the money required to maintain or expand its asset base. Free cash flow is important because it allows a company to pursue opportunities that enhance shareholder value. Without cash, it's tough to develop new products, make acquisitions, pay dividends and reduce debt. FCF is calculated as: EBIT(1-Tax Rate) + Depreciation & Amortization - Change in Net Working Capital - Capital Expenditure It can also be calculated by taking operating cash flow and subtracting capital expenditures. The balanced scorecard (BSC) is a strategy performance management tool - a semi-standard structured report, supported by design methods and automation tools, that can be used by managers to keep track of the execution of activities by the staff within their control and to monitor the consequences arising from these [1] actions. It is perhaps the best known of several such frameworks (it is the most widely adopted performance management framework reported in the annual survey of management tools undertaken by Bain & [2] Company, and has been widely adopted in English-speaking western countries and Scandinavia in the early 1990s).

What are the Key Benefits of using Balanced Scorecards?

Research has shown that organisations that use a Balanced Scorecard approach tend to outperform organisations without a formal approach to strategic performance management. The key benefits of using a BSC include (see Figure below):

1. Better Strategic Planning The Balanced Scorecard provides a powerful framework for building and communicating strategy. The business model is visualised in a Strategy Map which forces managers to think about cause-and-effect relationships. The process of creating a Strategy Map ensures that consensus is reached over a set of interrelated strategic objectives. It means that performance outcomes as well as key enablers or drivers of future performance (such as the intangibles) are identified to create a complete picture of the strategy. 2. Improved Strategy Communication & Execution The fact that the strategy with all its interrelated objectives is mapped on one piece of paper allows companies to easily communicate strategy internally and externally. We have known for a long time that a picture is worth a thousand words. This plan on a page facilities the understanding of the strategy and helps to engage staff and external stakeholders in the delivery and review of strategy. In the end it is impossible to execute a strategy that is not understood by everybody. 3. Better Management Information The Balanced Scorecard approach forces organisations to design key performance indicators for their various strategic objectives. This ensures that companies are measuring what actually matters. Research shows that companies with a BSC approach tend to report higher quality management information and gain increasing benefits from the way this information is used to guide management and decision making. 4. Improved Performance Reporting companies using a Balanced Scorecard approach tend to produce better performance reports than organisations without such a structured approach to performance management. Increasing needs and requirements for transparency can be met if companies create meaningful management reports and dashboards to communicate performance both internally and externally. 5. Better Strategic Alignment organisations with a Balanced Scorecard are able to better align their organisation with the strategic objectives. In order to execute a plan well, organisations need to ensure that all business and support units are working towards the same goals. Cascading the Balanced Scorecard into those units will help to achieve that and link strategy to operations. 6. Better Organisational Alignment well implemented Balanced Scorecards also help to align organisational processes such as budgeting, risk management and analytics with the strategic priorities. This will help to create a truly strategy focused organisation.

These are compelling benefits; however, they wont be realised if the Balanced Scorecard is implemented half-heartedly or if too many short cuts are taken during the implementation. For a more in-depth discussion of the main pitfalls please read the API white paper What is a Balanced Scorecard.

In business, a strategic business unit (SBU) is a profit center which focuses on product offering and market segment. SBUs typically have a discrete marketing plan, analysis of competition, and marketing campaign, even though they may be part of a larger business entity. An SBU may be a business unit within a larger corporation, or it may be a business unto itself. Corporations may be composed of multiple SBUs, each of which is responsible for its own profitability. General Electric is an example of a company with this sort of business organization. SBUs are able to affect most factors which influence their performance. Managed as separate businesses, they are responsible to a parent corporation. Companies today often use the word segmentation or division when referring to SBUs or an aggregation of SBUs that share such commonalities.

Types of Profitability measures: In order to evaluate the economic performance of a profit center, one must use net income after allocating all costs. However, in evaluating the performance of manager, any of five different measures of profitability can be used. 1) Contribution Margin: The logic behind using contribution margin as a measure is that fixed expenses are not controllable by the manager, and therefore he should focus on maximizing the spread between revenue and expenses. But the problem with this is that some fixed costs are controllable and all fixed costs are partially controllable. A focus on the contribution margin tends to direct attention away from this responsibility. 2) Direct Profit: This measure shows the amount that the profit center contributes to the general overhead and profit of the corporation. It incorporates all expenses incurred in or directly traced to the profit center, regardless of whether these items are entirely controllable by the profit center manager. A weakness of this measure is that it does not recognize the motivational benefit of charging headquarters costs. 3) Controllable Profit: Headquarters expenses are divided into two categories: controllable and non-controllable. The controllable expenses are controlled by business unit manager. Consequently, if these costs are included in the management system, the profit will be after the deduction of all expenses that are influenced by profit center manager. 4) Income before Taxes: In this measure, all corporate overhead is allocated to profit centers. The basis of allocation reflects the relative amount of expense that is incurred for each profit center. If corporate overheads are allocated to profit centers, budgeted costs, not actual costs, should be allocated. Then the performance report will show an identical amount in the budget and actual columns for such overheads. 5) Net Income: Here, companies measure performance of domestic profit centers at the bottom line, the amount of net income after income tax. There are two arguments 1) Income after tax is constant percentage of the pretax income, so there is no advantage in incorporating income taxes 2) many decisions that have impact on income taxes are made at headquarters, and it is believed that profit center manager should not be judged by the consequences of these decisions

Q2) Briefly describe engineered expenses centers and discretionary expenses centers. Howis budget prepared in each and how is performance evaluated in each? ANS) E x p e n s e c e n t e r s : Expenses center are responsibility centers for which input or expenses are measured in monetary terms,but for which outputs are not measured in monetary terms. There are two general types: engineeredexpense center a nd discretionary expense center. They correspond to two types of costs.. Engineered costsare elements of cost for which the right or proper amount of costs that should be incurred can beestimated with a reasonable degree of reliability. Costs incurred in f actory for direct labour d i r e c t material component supplies and utilities are examples. Engineered expense centers: Engineered expense center have the following characteristics: 1. T h e i r i n p u t s c a n b e m e a s u r e d i n m o n e t a r y t e r m s . 2. T h e i r o u t p u t c a n b e m e a s u r e d i n p h y s i c a l t e r m s . 3. The optimal dollar amount of input required to produce one unit of output can be established Engineered expense center usually are found in manufacturing operations. Warehousing, distribution,trucking and similar units in the marketing organization also may be engineered expense center and somany certain responsibility center within administrative and support department. Examples are accountsreceivable account payable and payroll section in the controller department personnel record and cafeteriain the human resource department shareholder record in the corporate s e c r e t a r y d e p a r t m e n t a n d t h e company motor pool. Such units perform repetitive task for which standard cost can be developed In an engineered expense center the output multiplied by the standard cost or each unit producedrepresents what the finished product should have cost. When this cost is compared to actual costs, thedifference between the two represents the efficiency of the organization unit being measured. We emphasize that engineered expense centers have other important tasks not measured by cast alone.The effectiveness of these aspects of performance should be controlled. For example expenses center supervisor are responsible for the quality of good and for the volume of production in addition to their responsibility for cost efficiency. Therefore the type and amount of production is prescribed and specificquality standards are set so that manufacturing costs are not minimized at the expense of quality.Moreover manager of engineered expense center may be responsible for activities such a training that

arenot related to current production judgment about their p e r f o r m a n c e s h o u l d i n c l u d e a n a p p r a i s a l o f h o w well they carry out these responsibilities. There are few if any responsibility center in which all cost items are engineered. Even in highlyautomated production department the amount of indirect labour and of various services used can vary withmanagement discretion. Thus, the term engineered costs cent er refers to responsibility center in which engineered costpredominate but it does not imply that valid engineering estimates can be made for each and every cost i t e m

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