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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?
1
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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/sing Segment -argin &eports
&evenue 4567777 48967777 49977777
:ariable Costs ;67777 567777 8;77777
Contribution -argin 4977777 4
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/sing Segment -argin &eports
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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/sing Segment -argin &eports
,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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/sing Segment -argin &eports
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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/sing Segment -argin &eports
+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.