Investment Center

An investment center is a segment or division within an organization that has control over
both its revenues and expenses, similar to a profit center. However, what sets an
investment center apart is that it also has authority over its invested capital or assets. It's
evaluated based on its profitability and its ability to effectively utilize its assets to generate
returns.
Characteristics of Investment Centers:
1. Revenue Generation and Cost Control: Like profit centers, investment centers are
responsible for generating revenues and managing costs associated with their
operations.
2. Control over Assets: They have authority over the allocation and utilization of their
assets, such as equipment, inventory, property, and other capital investments.
3. ROI and Capital Utilization: Investment centers are evaluated based on financial
metrics like Return on Investment (ROI) or Return on Capital Employed (ROCE).
These metrics measure how effectively the center utilizes its assets to generate
profits.
4. Decision-making Autonomy: They have a significant level of autonomy in making
investment decisions, such as capital expenditures, acquisitions, and divestitures,
which directly impact the center's performance.
Examples of Investment Centers:
1. Business Units with Asset Control: Divisions within a conglomerate, where each
division manages its resources, makes investment decisions, and is responsible for
generating profits. For example, if a conglomerate has separate divisions for
electronics, automotive, and healthcare, each could be an investment center.
2. Production Facilities: Different manufacturing plants or production facilities within a
company can function as investment centers. Each plant manages its production
assets, machinery, and inventory and is evaluated based on its profitability relative
to the assets employed.
3. Geographic Regions: In multinational corporations, various geographic regions or
international subsidiaries can operate as investment centers. Each region manages
its resources, capital, and investments, and its performance is measured against the
capital employed.
Importance of Investment Centers:
 Performance Measurement: Investment centers allow for the evaluation of how
effectively assets are being used to generate profits. This measurement helps in
identifying the most profitable units and areas requiring improvement.
 Resource Allocation: It assists in making informed decisions regarding the allocation
of capital and resources to different divisions or units based on their ability to
generate returns.
 Managerial Accountability: Managers overseeing investment centers are
accountable for not only generating profits but also for utilizing assets efficiently,
fostering a culture of accountability and strategic decision-making.
By utilizing investment centers, organizations can assess the performance of various
segments in terms of both profitability and asset utilization, enabling better resource
allocation and strategic planning.