How these layers are implemented in organizations
Ranks in management or simply management layers discussed earlier are implemented in the organizations by assigning different responsibilities to each and every manager. By dividing managers according to their responsibilities it is easy for staff to understand what is required from every person i.e. what role each person should fulfill, the scope of such role and to whom each person is answerable. This clears out any confusion and helps in managing the management itself.
From accounting and business perspective, managers are divided in four different categories according to their responsibilities.
- Cost center
- Revenue center
- Profit center
- Investment center
Cost center means a person, group of persons or a department responsible for incurrence of cost and are liable only for incurring cost. Examples include, marketing department, accounting department, production department.
Revenue center means a person, group of persons or a department responsible for generating revenue and are questioned for revenue only. Examples are sales department. Manager of a revenue center is not answerable for costs and is liable only for generation of sales revenue. Revenue center works in conjunction with cost center for example in order to sale finished goods sales department have to rely on production department for the provision of finished goods.
Profit center means a person, group of persons or a department responsible for both revenue and costs. As we know profit = revenue – cost that’s why manager of profit center is responsible to ensure revenues generated are in excess of cost. Basically profit center manager is one step up in the layers of management and managers of cost and revenue centers work under him. Therefore, profit center keeps an eye on the performance of both the centers and send out instructions to revenue and cost center to improve profitability. Among many other responsibilities, his major responsibility is coordinating cost center and revenue center activities so that one center is not putting a constraint on other department’s potential or whether one department is working too efficiently.
Investment center means a person, group of person or a department responsible for making investment decisions. Their performance is measured by means of how better the investment has been utilized i.e. by returns on investments which definitely means how effectively they work with and through the managers of profit center. Because manger of investment center decides about what investment can improvise investor’s (usually shareholders) wealth and then instruct the manager of profit center to work according to a planned scheme so that returns are insured.
Basically manager of investment center is one step above profit center manager just like manager of profit center was one step above cost center and revenue center manger.