Responsibility center is an object for which costs/revenues/capital expenditures are specifically collected and analyzed. Each responsibility center is usually managed and controlled by a separate manager.
The entity is often internally split into various types of responsibility centers for the purposes of smooth management, controlling and planning (budgeting).
Examples of responsibility centers:
Responsibility centers can be classified as:
Profit center is responsibility center, for which expenses and incomes (i.e. not investments) are specifically collected and analyzed. The objective of this type of responsibility center is profit maximization. Profit center can for example be a project, entire factory or shop as these objects have control over both revenues and costs.
Cost center is responsibility center, for which expenses (i.e. not revenues or investments) are specifically collected and analyzed. Cost center objective is minimization of costs. Cost centers usually manufacture goods or provide services for the rest of the entity as these objects incur costs but have no external revenues. It is for example a production department, production hall or a machine.
Revenue center is a type of responsibility center, for which incomes (i.e. not costs or investments) are collected and analyzed. Revenue centers are often responsible for generation of revenues and have little responsibility over costs. Their objective is therefore maximization of revenues. A good example can be a sales department.
Investment center is a type of responsibility center, for which information about expenses, incomes and investments (assets) are collected and analyzed. It is therefore the most comprehensive center from all other responsibility centers.
Separate financial statements are typically produced for investment centers. They can for example be the entire factory, branch or entity. The success of investment center is often evaluated based on metrics such as ROI (Return on Investments) or EVA (Economic Value Added).