First National Bank is a large municipal bank with several branch offices. The bank’s computer department handles all data processing for bank operations. In addition, the bank sells the computer department’s expertise in systems development and excess machine time to several small business firms, serving them as a service bureau.
The bank currently treats the computer department as a cost center. The manager of the computer department prepares a cost budget annually for senior bank officials to approve. Monthly operating reports compare actual and budgeted expenses. Revenues from the department’s service bureau activities are treated as other income by the bank and are not reflected on the computer department’s operating reports. The costs of servicing these clients are included in the computer department reports, however.
The manager of the computer department has proposed that bank management convert the computer department to a profit or investment center.
Required
a. Describe the characteristics that differentiate a cost center, a profit center, and an investment center from each other.
b. Would the manager of the computer department be likely to conduct the operations of the department differently if the department were classified as a profit center or an investment center rather than as a cost center? Explain.