Walden University Accounting for Decision Making Discussion
Respond to two or more of your colleagues in one or more of the following ways:
- Provide additional insights or contrasting perspectives about the cost center practices discussed by your peers. Be sure to respond to at least one colleague who selected a different country than you did.
- Describe the importance of the cost center that your colleague mentioned. Why is it needed and how does it contribute to the success of the organization?
- Provide additional insights or contrasting perspectives about the profit center described by one of your peers.
- Provide additional insights or contrasting perspectives about the investment center described by one of your peers.
RE: Discussion – Week 4
In reading this week I found that Portz & Lere (2010) the cost center
practices in German companies differ from the practices U.S. organization in
several ways. For instance, in Germany there cost center is limited so that a single
measure can represent their cost center output, whereas in the U.S. our cost centers
are limited such that decisions made by head primarily affect the cost (Portz &
Lere, 2010). We also have larger cost centers compared Germanys fairly small cost
centers. However, they have a larger number of cost centers in a firm while we
have relatively few. We also have output or activity measures that are used often
but don’t represent the output of the cost center; while in Germany they are
intended to represent the output of the cost center. That being said, the
classification of costs in a cost center of Germany is fixed and proportional, while
in the U.S. they are fixed and variable. Lastly, Germany typically has several
number of cost centers controlled by manager while the U.S. only has one.
I don’t have direct experience in dealing with this however, in a previous
company I worked for I’ve watched our CFO and Human Resource person deal
with health insurance and the CFO made sure we are not spending more than what
we should on unnecessary stuff. I remembered he would around to our IT
department to make sure that we were getting our money worth out of our
encryption software that we were using for the adjuster’s emails. We paid a
monthly fee but turn around and charge for every email sent out so we needed to
make sure that we were meeting the quota to ensure that the money was being
As for which country’s accounting practices I would choose to use? The
United States because according to Portz & Lere (2010) “the United states only
limitation on a cost center is that the decisions made by the head of the cost center
are primarily ones that have an impact on cost.” Again the limitations in the US are
less restrictive than Germany. I also prefer their conceptual framework as well as
comprehensive rules, regulations, and provisions in context to accounting.
The reading for the weeks discusses how Chevrolet and Buick are two profit
centers within the General Motors Company. If Chevy decided to raise quality of
their cars to gain higher profits this could affect all General Motors cars, including
Buick. The consumer may see only the quality improvements in Buick therefore
not giving Chevy any credit then they may have to lower their investments on the
quality side. Sometimes managers base profits on a group wide and not just an
individual basis, so therefore if the entire group does not gain profit then the
individual profit center does not gain profit (Zimmerman, 2014).
An investment center is responsible for its own revenue, expenses, and
assets. It’s a separate operating entity for reporting purposes, with its own financial
statements. Examples of an investment center could be a subsidiary company
and/or a division because it is accountable for inputs and outputs as well as for the
investment patterns too (Zimmerman, 2014).
The best method of performance evaluation is EVA. Economic value added
is a popular method of performance evaluation which is used to measure the
surplus value created by an investment or portfolio investments. It is considered to
be a better measure of divisional performance as compared to return on investment
or assets. That is why this method is also considered as best contributor towards
the overall efficiency of the business enterprise against traditional methods like
return on assets, return on capital employed and return on equity etc. (Zimmerman,
Portz, K., & Lere, J. C. (2010). Cost center practices in Germany and the United
States: Impact of country differences on managerial accounting
practices. American Journal of Business, 25(1), 45–52. Retrieved from the
Walden Library databases.
Zimmerman, J. L. (2014). Accounting for decision making and control (8th ed.).
New York, NY: McGraw-Hill.
Chapter 5, “Responsibility Accounting and Transfer Pricing” (pp. 163–195)
RE: Discussion – Week 4
Accounting practices occur worldwide through business; however, countries do not all manage accounting
the same way. It is important to understand the practices of the world as we interact in globalized economy. In prior
years, I worked for a medical billing company whose main focus was to acquire medical clients “hospitals.” The
company was tasked with running the billing operations for their clients. One of the cost centers for this company
was their Human Resources Department (HR). The HR Department, although, very small did not contribute to the
main operations of the company; therefore, it would be considered a cost center. As the company grows, the HR
department will have to grow along-side it. Therefore, the HR department resources will be used more often. The
HR department is just one of many measures that represent costs of the center. In Germany, however GPK is limited
to a single measure representing cost center output.
The United States offers a better system for accounting practices. The fact that multiple measures are
utilized to make a determination make the system more accurate. Additionally, in the United States firms usually
have a smaller number of cost centers which allows for better command and control from the managers (Portz &
In the medical billing example used above, the company makes a profit when the sale department acquires
new clients. I am not sure exactly how the contracts were created, but an example would be that the company would
run the billing side for the client for a year and charge them 5 percent of all profits made from their efforts.
Therefore, the sales department is a profit center
During my time with the company, I realized that the Chief Executive sought out to make relationships for
and find new investment opportunities such as mergers and acquisitions of smaller billing companies. This might not
be considered a investment center since the CEO is already receiving a salary that would cover those duties.
Portz, K., & Lere, J. C. (2010). Cost center practices in Germany and the United States: Impact of country
differences on managerial accounting practices. American Journal of Business, 25(1), 45-52.