controls revenues costs and hence profits Profit center Corporate controls

Controls revenues costs and hence profits profit

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controls revenues, costs and hence profits Profit center Corporate controls captial investments PPE Profit center managers typically responsible for Promotion Inventory Prices in some respects Purchasing
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Profit Center Example: franchises Restaurant's, hotels … Classify center results as Uncontrollable by Manager? Controllable by Manager Controllable by Corporate Include performance measures by the center that are
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Investment Center Center manager controls Revenue, cost, and investment level Measures Profit [Cost, Revenue] ROI Example One where managers have full budget authority
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Responsibility Center: Summary
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Evaluating Responsibility Centers Controllability principle for center and manager evaluation Key: Authority or controllability Issue: What happens when centers are interdependent? How to evaluate the centers? Individual success versus organizational success Measurement problems occur with integrated businesses, jointly produced products
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Segment Margin Reports Use when there are jointly produced costs and revenues across multiple segments Create a report showing, for each segment, Revenue, variable cost, contribution margin, overhead allocation, & income Evaluate each segment using this report Identify avoidable costs (if segment eliminated, staff reduced, processes changed) Identify segment contribution margin
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Example Segment Margin Reports
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Interpreting Segment Margin Reports Segment margin is segment profit Allocated avoidable costs Overhead that overtime can be eliminated Need a reference point to interpret numbers Common reference points
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Cautions Regarding Segment Margin Report Interpretations Purely financial data in the aggregate Often combine segment reports with nonfinancial measures (e.g., customer satisfaction, loyalty, delivery times) Key underlying concept for these measures
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Transfer Prices Transfer price is the price charged for jointly produced products or components across segments of the same organization Incentives Buyer wants a low price Seller wants a high price
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Transfer Price Incentives Notice the incentives of the buyer and seller for the transfer price Organizational perspective, wants transfer prices to Due to these conflicting incentives, there need to be organizational approaches to transfer prices
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Approaches to Transfer Prices Approaches Market-based Use a price seen on the market Cost-based Negotiated Administered Objectives
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Market-Based Transfer Prices
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