Compare and contrast the three types of responsibility centers

Three types of responsibilities centers are:

• Investment centers
• Cost centers
• Profit centers

Comparing and contrasting these three responsibility centers:

• Investment centers: under this system, manager has control over the profits/revenue, cost, and investments of the business organization.
• Cost centers: under this system, manager has control over the cost and does not possess and control over the profit/revenue or investments of the business organization.
• Profit centers: under this system, manager has control over the cost and profit/revenue of the business bit does not control the investments of the business organization.

Best way to evaluate manager's performance:

• Investment centers: whether the manager is able to manage investment-related decisions, whether his investment decisions are resulting positively, whether manager is able to produce profits for the company.
• Cost centers: whether manager is able to manage the cost of the organization and whether the cost is affecting the organization budget or not.
• Profit centers: whether the manager is able to make profits and revenues for the organization.

Problem with using financial measures of performance (return on investment) are:

• It provides information on the basis of past performances and hence cannot be predicted accurately.
• Financial measures may not consider the creativity level of the individual. It marks the individual based on his conceptual knowledge and not on his competitive knowledge.