Differentiate between cost, profit, investment and revenue centres.
Best Ad Ltd has three divisions which are Advertisings, Market Research and Event management. One of its profitable divisions is advertising division. This division is divided into three operating units: TV, Radio and Press, which operate from different offices. The TV unit has three main functions:
1. Concept design and strategy
2. Production house and
3. Media scheduling.
Best Ad Ltd company might organize its cost and management system as follows:
Each of the divisions in the Best Ad Ltd, including the advertising division is handled by senior manager. The senior manager has the authority to incur capital expenditure to acquire new assets for the division. The performance of the advertising division might be measured by its annual return on investment (ROI).
Within the advertising division, the TV unit, concept design and strategy unit and production house. The manager of each unit might be responsible for the revenues and costs of the unit, and the performance of each unit would be measured by the profit that it makes.
Within the production house, each of the operating functions (In sight production, Post production, and editing and music composition) might be a cost unit. The manager in charge of each unit is responsible for costs, and the performance of the cost unit might be measured by comparing the actual costs of the cost centre with its budgeted costs.
1. Using the above scenario list all the divisions of Best Ad Ltd.
2. Differentiate them between cost, profit, revenue and investment centres and explain how managers of responsibility centres are responsible for the performance of their part of the organization and its activities.
3. How performance of each of the above division is measured?