Question

4.How can you evaluate the investment centre? Explain.

Answer 1

The investment center is the most sophisticated of the various methods of reporting the results of a business, since it encompass all financial measures of performance.

An investment center, also called as investment division, is a way to classify and evaluate a department based on it's revenues, costs and asset investment. Inserted of categorizing departments into cost centres centres and profit centres, management ofen looks at departments has investment centres. in other words, it's a different way of looking at and evaluating how do divisions and departments perform.

The three reporting methods are cost centre , profit centre and investment centre.

Cost centre:

A business unit is judged on the basis of cost it incurs. The focus is on minimising costs.

Profit centre:

A business unit is judged based on it's profits it generates. The focus is on increasing profits, which can be achieved through a combination of increasing revenues and reducing expenses.

Investment center:

A business unit is judged based on its return on investment. The focus is on increasing this return both in total dollars and as a percentage of sales.this can be achieved with the combination of increasing sales reducing expenses and reducing the investments in assets.

The investment centre concept is most useful in situations where there is a large investment by business unit in fixed assets andworking capital.