i) Cost Centre:

Cost centres are responsibility centres where the managers have authority only to incur costs. These centres only incur costs but do not directly generate revenues. Managers of such cost centres are therefore evaluated based on their ability to control costs. The manager’s ability to meet the goals of budgeted controllable costs becomes the main focus. The evaluation reports for the centre compare the actual controllable costs with flexed controllable costs budget data.

(2 marks)

ii) Revenue/Profit Centre:

Managers of profit centres have responsibility to incur costs as well as generate revenues. Managers of these centres are therefore evaluated based on the profitability of their centres. To evaluate the performance of managers of profit centres, information on controllable costs and revenues are gathered. Fixed costs must be distinguished between direct and indirect costs. The profitability of these centres is measured by the controllable margin (contribution less controllable fixed costs).

(2 marks)

iii) Investment Centre:

Investment centres, in addition to incurring costs and expenses and generating revenues, have control over investment decisions (acquisition and disposal of long-term assets). Managers of investment centres are evaluated both on the profitability of the centres they manage and the rate of return on the funds invested. Since investment centre managers have control or significant influence over investment funds, the primary basis for evaluating the performance of the managers is the return on investment (ROI).

(2 marks)