Budgeting Basics and Beyond

22.6. Investment Center

An investment center is a responsibility center that has control over revenue, cost, and investment funds. It is a profit center whose performance is evaluated on the basis of the return earned on invested capital. Corporate headquarters and product line divisions in a large decentralized organization are examples of investment centers. They are widely used in highly diversified companies.

A divisional investment is the amount placed in that division, under division management control. Two major performance indicators are return on investment and residual income. We should use available total assets in these measures to take into account all assets in the division, whether used or not. By including nonproductive assets in the base, the manager is motivated either to retain or sell them. Assets assigned to a division include direct assets in the division and allocated corporate assets. Assets are reflected at book value. Include facilities being constructed in the investment base, if the division is committing the funds for the new asset.

Distinguish between controllable and noncontrollable investment. Although the former is helpful in appraising a manager's performance, the latter is used to evaluate the entire division. Controllable investment depends on the degree of a division's autonomy. Thus, an investment center manager accepts responsibility for both the center's assets and its controllable income.

In obtaining divisional investment, there has to ...