Evaluating Performance and Non value- Added Costs in a Doctor's Office

Welcome to Week 6; this week we cover Evaluating Performance!

The term responsibility center is used for any part of an organization whose manager has control over and is accountable for cost, profit, or investments.  The three primary types of responsibility centers are cost centers, profit centers and investment centers.  Responsibility accounting link lower level managers’ decision making with accountability for the outcomes of those decisions.

The manager of a cost center has control of costs; however, not over revenue or the use of investment funds.  Manufacturing facilities are typically considered cost centers.  Managers of cost centers are expected to minimize costs while providing the level of products and services demanded by other areas of the organization.

The manager of profit center has control over both costs and revenues but not over the use of investment funds.  Profit center managers are often evaluated by comparing actual profit to projected profit.

The manager of an investment center has control over costs, revenues and investments.

A profit center may have both direct and indirect fixed costs.  Direct fixed costs relate specifically to one center and are incurred for the sole benefit of that center.

Investment center managers can control or significantly influence the investment funds available for use.  Because of this the primary basis for evaluating the performance of a manager of an investment center is return on investment (ROI). 

Return on Investment (ROI) = (Controllable Margin)/(Average Operating Assets)