In what situation will an organization choose to make their business units investment centres instead of any other types of responsibility centres
There are four types of responsibility centres. These include cost, revenue, profit and investment centres. The business units in an organization are considered as investment centres which are associated with profit as well as investment. There is complete control over revenues, expenses and the investment made in the assets of the business unit. The traditional way for looking at the departments result in classification of the business unit either as profit centre or the cost centre i.e. the department or business unit is considered as either generating profit or they contribute to the cost (Drury 2013).
In the investment centre approach the analysis of the assets and resources that are available and how these are utilized in generated surplus i.e. profit and costs are consideration is also there. Thus this method is often used in situations wherein huge investment is made in the development of assets. These assets development can be with respect to working capital or fixed assets.
In absence of situation wherein the significant investment is not made the focus will be on profitability or costing. In case huge investment is made the balance between the profitability and costing has to be made. The investment centre will be quite comprehensive in case of business units requiring huge investment. This approach is adopted particularly in the manufacturing industries.
The approach of considering business units as investment centre is particularly adopted in case of business scaling as well wherein return with respect to the investment made in the business is important aspect.