The underlying principle of allocating operating expenses to departments is to assign to each department an amount of expense proportional to the revenues of that department.
The profit margin component of rate of return on investment analysis focuses on profitability by indicating the rate of profit earned on each sales dollar.
The three common types of responsibility centers are referred to as cost centers, profit centers, and investment centers.
Property tax expense for a department store's store equipment is an example of a direct expense.
Service department charges are similar to the expenses of a profit center that purchased services from a source outside the company.
By using the rate of return on investment as a divisional performance measure, divisional managers will always be motivated to invest in proposals which will increase the overall rate of return for the company.