Answer: Decentralization refers to the distribution of power from the highest form of authority to the lowest one.
A cost center focuses on managing and controlling costs, a profit center is responsible for generating revenue and earning profits, and an investment center has the additional responsibility of allocating and utilizing investment resources effectively.
Step-by-step explanation:
Decentralization refers to the distribution of power, authority, and decision-making from a central authority or organization to lower levels or local units within the system. It involves delegating decision-making responsibilities and autonomy to different levels or entities within an organization or a larger system.
Benefits of decentralization include:
1. Quicker decision-making
2. Flexibility and adaptability
3. Improved employee motivation and engagement
4. Local expertise and knowledge utilization
Now, let's distinguish between a cost center, a profit center, and an investment center:
Cost Center: A cost center is a specific unit or department within an organization that incurs costs but does not directly generate revenue. The primary objective of a cost center is to manage and control costs associated with its operations. Examples of cost centers include administrative departments, support functions, or maintenance departments.
Profit Center: A profit center is a specific unit or department within an organization that is responsible for generating revenue and, ideally, earning a profit. Profit centers have the authority and accountability to make decisions that directly impact their revenue and expenses. Examples of profit centers can include product lines, business divisions, or retail outlets.
Investment Center: An investment center is a specific unit or department within an organization that not only generates revenue and incurs costs but also has control over the allocation and utilization of investment resources. Investment centers are evaluated based on their ability to generate profits while effectively utilizing invested capital. Examples of investment centers can be whole divisions, subsidiaries, or business units within a larger organization.