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
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
Investment Center • Center manager controls – Revenue, cost, and investment level • Measures – Profit [Cost, Revenue] – ROI • Example – One where managers have full budget authority
Responsibility Center: Summary
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
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
Example Segment Margin Reports
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
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
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
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
Approaches to Transfer Prices • Approaches – Market-based • Use a price seen on the market – Cost-based – Negotiated – Administered • Objectives
Market-Based Transfer Prices •
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