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    This document discusses profit centers and how businesses can be organized as profit centers. It defines a profit center as a responsibility center whose manager is responsible for generating profit. Profit centers allow businesses to delegate more authority to operating managers. Some advantages of profit centers include improved decision making and increased manager initiative. Some challenges include potential loss of control and emphasis on short-term profitability over long-term corporate optimization. The document also discusses how marketing, manufacturing, and service units can be organized as profit centers and measured using indicators like contribution margin, direct profit, and controllable profit.

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    This document discusses profit centers and how businesses can be organized as profit centers. It defines a profit center as a responsibility center whose manager is responsible for generating profit. Profit centers allow businesses to delegate more authority to operating managers. Some advantages of profit centers include improved decision making and increased manager initiative. Some challenges include potential loss of control and emphasis on short-term profitability over long-term corporate optimization. The document also discusses how marketing, manufacturing, and service units can be organized as profit centers and measured using indicators like contribution margin, direct profit, and controllable profit.

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    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
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    61 views15 pages

    Chapter 5 - Profit Centers

    Uploaded by

    siti fatimatuzzahra
    This document discusses profit centers and how businesses can be organized as profit centers. It defines a profit center as a responsibility center whose manager is responsible for generating profit. Profit centers allow businesses to delegate more authority to operating managers. Some advantages of profit centers include improved decision making and increased manager initiative. Some challenges include potential loss of control and emphasis on short-term profitability over long-term corporate optimization. The document also discusses how marketing, manufacturing, and service units can be organized as profit centers and measured using indicators like contribution margin, direct profit, and controllable profit.

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
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    of 15

    Chapter

    Chapter Profit Centers


    55

    Faculty of Economics and Business - Accounting Undergraduate Program


    Profit Centers:
    Part I
    General Consideration

    Faculty of Economics and Business - Accounting Undergraduate Program


    Profit Center: Understanding

    Profit center is responsibility center whose manager


    has responsibility to generate profit
    Since profit is revenues expenses, focus of Profit
    centers manager is how to increase revenues and
    control expenses

    Faculty of Economics and Business - Accounting Undergraduate Program


    Functional organization, Business Unit &
    Profit Center

    A Functional organization is a principal that


    manufacturing or marketing function is performed by
    a separate organization unit
    Companies create business units because they have
    decided to delegate more authority to operating
    managers

    Faculty of Economics and Business - Accounting Undergraduate Program


    Advantages of Profit centers

    Quality of decisions may improve


    The speed operating decisions may be increased
    Headquarter management is Relieved of day to day decisions
    making
    Managers are freer to use their imagination and initiative
    Training ground for general management
    Profit consciousness is enhanced
    Provide top management with ready-made information
    Responsive to pressures to improve competitive performance

    Faculty of Economics and Business - Accounting Undergraduate Program


    Difficulties of Profit centers

    Headquarter is being Los of control


    The quality of decisions made at the unit level may be
    reduced
    Friction may increase over the appropriate transfer price
    Competition with one another business units
    Divisionalization may impose additional costs
    Competent general managers may not exist
    Emphasis on short-run profitability
    Optimization profit for corporation may not be achieved

    Faculty of Economics and Business - Accounting Undergraduate Program


    Business Units as Profit
    Part II
    Centers

    Faculty of Economics and Business - Accounting Undergraduate Program


    Business Units as Profit Centers

    Business units are created as profit centers since


    mangers in charge of product development,
    manufacturing and marketing

    1. Product development ( what goods or services to make


    and sell)
    2. Manufacturing ( how to manufacture the goods or
    services)
    3. Marketing ( how, where, and for how much are goods
    or services to be sold)

    Faculty of Economics and Business - Accounting Undergraduate Program


    Business Units as Profit Centers: Constraints

    Faculty of Economics and Business - Accounting Undergraduate Program


    Part III Other Profit Centers

    Faculty of Economics and Business - Accounting Undergraduate Program


    Other Profit Centers

    Marketing
    A marketing activity can be turned into a profit center by
    charging it with the cost of the products sold using transfer
    price mechanism
    The transfer price charge to the profit center should be based
    on the standard cost, rather the actual cost, of the products
    Manufacturing
    being sold
    Giving credit to manufacturing units
    ( Selling price Marketing expense) Standard Manufacturing
    production = profit for manufacturing unit

    Service and Support Units

    Charge customers for services rendered

    Faculty of Economics and Business - Accounting Undergraduate Program


    Part IV Measuring Profitability

    Faculty of Economics and Business - Accounting Undergraduate Program


    Measurements performance in Profit Center

    Management Performance
    Planning
    Coordinating
    Controlling

    Economic Performance
    Financial indicators ( Profitability
    Measures)
    Faculty of Economics and Business - Accounting Undergraduate Program
    Types of profitability Measures

    Profit Center Income Statement


    Contributi
    on margin Revenues XXX
    Cost of Sales (XXX)
    Direct Variable expenses (XXX)
    Profit Contribution Margin XXX
    Fixed Expenses (XXX)
    Controllabl Direct Profits XXX
    e Profit
    Controllable Corporate Charges (XXX)
    Income Controllable Profit XXX
    Before Other Corporate Allocations (XXX)
    Taxes
    Income before Taxes XXX
    Net Taxes (XXX)
    Income Income XXX

    Faculty of Economics and Business - Accounting Undergraduate Program


    Types of profitability Measures
    Contribution Argumentation: Fixed expenses are beyond control
    Problem: Fixed Expenses are partially controllable and Fully
    margin controllable
    Incorporated all expenses ( Fixed and Variable) traceable to the
    Direct Profit profit center
    Excluded expenses incurred at headquarter

    Controllable Included controllable expenses incurred in headquarter


    Profit
    Income Before Included both controllable and uncontrollable expenses
    incurred at headquarter
    Tax
    Net Income Accommodating all expenses

    Faculty of Economics and Business - Accounting Undergraduate Program

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