Every SBU is Profit Center but Every Profit Center is Not SBU

Definition of SBU: Most business units are created as profit centers since managers in charge of nsuch unit control product development, manufacturing & marketing. These managers can influence revenue and cost and they can be held responsible for the bottom line. A business unit managers authority may be restricted which is reflected in the design and operation of the profit center. Examples of profit centers which are not SBU:

(1)

Functional Unit:

Multi-Business companies are divided into different business units, each of which is treated as an independent profit generating unit but the sub unit of these business units may be functionally organized. The company desires operation as profit centers but there is no fixed rule to classify business units as profit centers and others. It is the management decision if a business unit should be a profit centers depending upon the amount of authority the business unit manager has over the bottom line.

One of the openion is to change such a Manufacturing unit (SBU) into a profit center & give credit for sales, selling, but this is imperfect because sales are beyond their control and hence profit will fluctuate.

(a) Marketing: Marketing can be turned into profit center by charging it with the cost of goods sold. This transfer price provides the marketing manager with information required to make optimum, revenue & cost tradeoff and the standard practice of measuring a profit center manager suing profitability provides a check by the top management. The Transfer Price can be the standard cost rather than actual cost. When marketing managerssxist in different regional areas it is difficult to market, set the price, advertise, and conduct traning it would be best converted into a profit center. (b) Manufacturing: Manufacturing is an expenses center & managers are judged on standard v/s actual cot whose disadvantages are: Managers may reduce cost of quality control, & transfer goods of infiror quality. The manufacturing managers will not change his schedule to accommodate an urgent order. There is no incentive or motivation for the manufacturing managers.

(2)

Service & Support Unit:

Units for maintenance =, IT, Transportation, customer services etc. are all support activities but they can also be converted into profit centers. They can charge customers internally & externally for services provided such that revenue is at least equal to expenses. When service units are organized as profit centers their managers are motivated to control cost to prevent customers from going elsewhere, while managers of the receiving units are motivated to make decision about suing the services and paying the price.