Explain how responsibility centers are used for the budgeting process
Responsibility centers are subdivided into three different categories and each one has specific
controls. This type of accounting is an information reporting system which: classifies financial
data according to the responsibility areas of an organization and; reports upon the managers
activities, more specifically, only the income and expense categories that a certain manager
controls (Grousanu & Rachisan, 2009). The first is costs centers, which control the costs they
acquire (Epstein & Schneider, 2014). An example would be facilities management. The second
subdivision is the profit center. The profit center, like patient care areas, is responsible for
controlling the incurring costs and the revenue that is generated (Epstein & Schneider, 2014).
The investment center is the final subcategory. This subcategory controls costs, revenues, and
investment assets that are used. An example of this is a medical research department (Epstein &
Epstein, L. & Schneider, A. (2014). Accounting for Health Care Professionals. San Diego, CA:
Bridgepoint Education, Inc.
Grousanu, A., & Rachisan Paula, R. (2009). Study Regarding the Organization of Management
Accounting in the Context of Responsibility Centers. Annals of the University Of Oradea:
Economic Science, (1), 966.
Compare strengths and weaknesses of capital investment evaluation methods
Capital investments have three main evaluation methods: present value methods, payback period
method, and accounting rate of return method. The present value methods are subdivided into
net present value method (NPV) and internal rate of return method (IRR) (Epstein & Schneider, 2014).
Each one of these evaluation methods have their strengths and weaknesses of capital investment.
Some strengths of present cash value methods are that is considers “the time value of money and looks
at the cash flows over the entire life of the project” (Averkamp, 2015, para. 4). Cash flows are used for
companies to gain control of assets. The weakness of these methods are that the process can become
very complex and also requires assumptions to be made about future value of cash, which can lead to
inaccurate findings (Epstein & Schneider, 2014).
“The payback period method is a “quick and dirty” evaluation of capital investment projects” because
this is generally not used solely to make investment decisions. Although, this is a weakness many
businesses still use this as part of their analysis because of its simplicity and lower risks (Epstein &
The strengths of accounting rate of return method are that it measures the profitability of investment,
easy to understand and calculate, and accounting information is used so special reports are not
required. Weaknesses are it does not consider the value of the project, it ignores the cash-flow from
investment, and it also ignores the time value of money (Epstein & Schneider, 2014).
Averkamp, H. (2015). What are some of the methods for evaluating capital expenditures?
Accounting Coach. Retrieved from: http://www.accountingcoach.com/blog/evaluating-capitalexpenditures
Epstein, L. & Schneider, A. (2014). Accounting for Health Care Professionals. San Diego, CA: Bridgepoint
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