Definition of 'Investment Center'
There are two main types of investment centers: profit centers and cost centers. A profit center is a unit that is responsible for both its revenues and costs. The profit center manager is evaluated on the profit generated by the center. A cost center is a unit that is responsible for its costs, but not its revenues. The cost center manager is evaluated on the efficiency with which the center operates.
The investment center concept is based on the idea of decentralization. Decentralization is the delegation of decision-making authority to lower levels of management. Decentralization can improve efficiency and effectiveness by allowing managers to make decisions that are closer to the customer. However, decentralization can also increase the risk of suboptimization, which occurs when a decision is made that is optimal for the individual unit, but not for the company as a whole.
The investment center concept is a tool that can be used to manage the trade-off between efficiency and effectiveness. By decentralization, investment centers can improve efficiency and effectiveness. However, the company must also be careful to avoid suboptimization.
The investment center concept is often used in conjunction with the transfer pricing system. Transfer pricing is the process of setting prices for goods and services that are transferred between different units of a company. The transfer price should reflect the true cost of the goods or services being transferred. This will ensure that the investment centers are making decisions that are in the best interests of the company as a whole.
The investment center concept is a valuable tool for managing decentralized organizations. By decentralization, investment centers can improve efficiency and effectiveness. However, the company must also be careful to avoid suboptimization.
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