Chepter-5 Profit Centers

8/9/2019 Chepter-5 Profit Centers

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Profit centers

Chapter 5


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Profit Centers

What is a profit center?

It is a responsibility center whose manager

and other employees control both therevenues and the costs of the product or

service they sell or deliver.


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Advantages of profit center

Quality of decision

Speed of decision

ead!uarter may relived from day"to"day decision

free to ta#e Initiative $%cellent training grounds to the managers of

business unit

Profit consciousness

&eady made information to the head!uarter

Improves competitive performance


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'ifficulties with Profit center

It will force top management to rely on managementcontrol reports rather than personal #nowledge

Quality of decision ma#ing reduces

(riction of transfer pricing increases Internal competition increases

Additional cost for additional staff

Short run profitability at the cost of long run profit

)o surety that individual profit center will optimi*ethe profit of whole organi*ation


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+usiness unit as profit center

Constraints on business

" Constraints from other business unit

" Constraint from corporate management


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,ther profit centers

(unctional units

" -ar#eting

" -anufacturing" Service and support units


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-easuring profitability

Contribution margin

'irect profit

Controllable profit Income before ta%

)et income

&evenues


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&esponsibility Centers

What is an investment center?

It is a responsibility center whose manager

and other employees control the revenuescosts and the level of investment in the

responsibility center.


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Identify the issues to consider

and basic tools to use in

assessing the performance

of a responsibility center.


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$valuating &esponsibility Centers

/nderlying the accounting classifications of

responsibility centers is the concept of

controllability.

0he controllability principle asserts that

people should only be held accountable for

results that they can control.

It is often difficult to apply the controllability

principle.


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$valuating &esponsibility Centers

What are some problems associated with

controllability?

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2ointly earned revenues and3or 2ointlyincurred costs

1 intricate and often arbitrary accounting

procedures


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Assess the issues and

problems created by revenue

and cost interactions in

evaluating the performance

of an organization unit.


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/sing Segment -argin &eports

What is a segment margin?

It is the level of controllable profit reported

by an organi*ational unit or product line.


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&evenue 4567777 48967777 49977777

:ariable Costs ;67777 567777 8;77777

Contribution -argin 4977777 4


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What type of problem can occur when

organi*ations evaluate responsibility

centers as profit centers?

1 identifying responsibility for the control of

sales and costs


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,rgani*ations use two different approaches to

evaluate segment margin numbersB

8 Past performance

Is performance this period reasonable given

past e%perience?

9 Comparable organi*ations

ow does performance compare to similar

organi*ations?


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What are some limitations of segment margin

reporting?

8 -argins can be highly aggregated summaries.

9 Some segment reports contain arbitrary or

soft numbers.

< &evenue figures often reflect assumptions

and allocations that can be misleading.


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+ecause of these limitations interpreting

segment margins should be done carefully.

,ther critical success factors should be usedas well to assess performance.


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Identify the transfer-pricing

alternatives available to

organizations and the criteria

for choosing a transfer

pricing alternative.

Chepter-5 Profit Centers

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