Recall (from Chapter 6) that a responsibility center is a segment or subunit of the organization whose manager is accountable for a specified set of activities. To measure the performance of subunits in centralized or decentralized companies, the management control system uses one or a mix of the four types of responsibility centers:
Each type of responsibility center can be found in either centralized or decentralized companies.
A common misconception is that profit center—and, in some cases, investment center—is a synonym for a decentralized subunit and cost center is a synonym for a centralized subunit. Profit centers can be coupled with a highly centralized organization, and cost centers can be coupled with a highly decentralized organization. For example, managers in a division organized as a profit center may have little freedom in making decisions. They may need to obtain approval from corporate headquarters for introducing new products and services or to make expenditures over some preset limit. When Michael Eisner ran Walt Disney Company, the giant media and entertainment conglomerate, from 1984 until 2005, the firm’s strategic-planning division scrutinized business proposals so closely that managers were reluctant to pitch new ideas.* In other companies, divisions such as information technology may be organized as cost centers, but their managers may have great latitude to make capital expenditures and purchase materials and services. In short, the labels profit center and cost center are independent of the degree of centralization or decentralization in a company.