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ALVAREDO ARITONANG
ANDIKA SYAHPUTERA
Profit Centers
When a responsibility centers financial performance is measured in terms of profit (i.e. by the difference between revenue and expense) the center is called a profit center
Top Management
Production Division
Marketing Division
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Product B
Product A
Product B
Product A
Product B
Product A
Product B
Profit Centers
General Considerations:
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Conditions for delegating profit responsibility: many management decisions involve proposals to increase expenses with the expectation to increase the revenues. For delegating this responsibility to any department head or manager two condition should exists. The manager should have access to the relevant information needed to make such decision. There should be some way to measure the effectiveness of the trade-offs the manager has made.
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But most of the new companies in the U.S. have it after World War II
Chemical Bank: adopting the concept of profit centers and eliminate programs that are not profitable and the bank branch profitability measure more accurately Novell: to identify and remove some businesses are not profitable Nokia: Profit Centers split into six business with responsibilities based on specific market segments. Financial control systems have weaknesses But still greater benefits Combined analysis between financial and non-financial.
Overall performance measurement of a particular business unit is not possible as it taking major things or synergies from other business units.
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Measuring Profitability
There are two types of profitability measurement used in evaluating a profit center. They are measurement of the management performance and measurement of the economic performance. The management performance focuses on how well the manager is doing. This measure is used for planning, coordinating and controlling the profit centers day to day activities. While the economic performance is focuses on how well the profit center is doing an economic activity. The necessary information for both purposes are taken from different department and reports are made for the same.
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Contribution Margin
Contribution margin reflects the spread between revenue and variable expenses.
The profit center manager can increase the contribution margin by increasing the sales and decreasing the cost. The fixed cost are beyond the control, but there can be changes into the discretionary costs.
Direct Profit
This measure reflects a profit centers contribution to the general overhead and profit of the organization.
It incorporates all the expenses directly traceable to the profit either it is from the same department or any other department.
A weakness of the direct profit measure is that it does not recognize the motivational benefit of charging headquarters cost
Controllable Profit
Headquarters expenses can be divided into two categories: controllable and uncontrollable. Controllable expenses are those which can be controlled at certain level like information technology or services. Thus, the profit centers can take the burden and generate the level of profit which can be compared with the industry profit. While if the profit centers are taking the uncontrollable cost of the headquarters they are unable to generate moderate level of continued profits.
Net Income
Here the companies measure the performance of domestic profit centers according to the bottom line, means the amount of net income after income tax.
Choosing the appropriate revenue recognition method is important. Should revenues be recorded when an order is placed, when an order is shipped or when cash is received?