Profit Centre imp

8/7/2019 Profit Centre imp.

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Profit CentreProfit is most comprehensive measure of performanceFunction/Activity having highest influence on Bottom Line suits bestfor Profit Center.Can be a Business Division or any of the functional unitDemands highest freedom/autonomy than any other RCs

Inputs Output(Money spent for RC s (Money-profit

earning profits) TASK Earned out of sales)Relationship can be established



Profit Centre

Decision Rights Input Mix Labor, Material, SuppliesProduct MixSelling Price

Performance Measures Actual ProfitsActual Profit in comparison with budgeted profits

Typically used when RC manager has knowledge about correct price/quantityRC manager has knowledge to select optimal product mix

CANDIDATES FOR PROFIT CENTER



Business Unit as Profit Centre

Business Units In a Decentralized CompanyBest suited as Profit Center

Marketing Center as Profit Center±

Marketing Function having highest influence on BottomLine, e.g. Colgate, Coca-Cola, Wipro- Bath Soaps division, Dabur-Cosmetics division etc.

± When centralized control is infeasible e.g. ForeignMarketing Center e.g. IBM, Microsoft, Honda India

To Convert Marketing Division into Profit CenterCharge cost of production to revenue centerGrant of maximum autonomy to the unitDelegate sufficient authorityTreat the unit as a mini company



Functional Unit as Profit CentreFunctional Unit as Profit Centre

Manufacturing Division ± When Cost of production having highest impact on Bottom

Line and±

When Marketing Function is relatively insignificant» e.g. Nirama DetergentTo convert a Production Division in to Profit Center

Credit selling price less marketing expenses to production division

3. Service and Support Centre » e.g. Maintenance, Customer Service, Transportation,

Engineering Design Divisions

Given greater autonomy, helps them to cut cost and make itsoperations more efficient



Profit Centre Performance MeasuresPerformance Measure Justification

Reve nu e

Less VC of Mfg. & Marketing

1. Contribution Margin Fixed Cost is beyond control of PCLess Fixed Expenses

2 . Dir ec t Profit All Expenses incurred at the behest of PCLess Controllable Corporate Expenses

3 . Controllabl e Profit Some HQ expenses exclusively incurredLess Other Corporate Allocations for given PC at HQ IT services

4.

Ne

t Profit Be

fore

taxe

s Common unavoidable expensesLess Income tax incurred to run a company ; e.g.All administration, financing and taxplanning activities are carried at HQ

5 . Ne t Profit In some cases RC do haveimpact on tax liability of the company -Tax Heavens



Profit Centre - AdvantagesImproves quality of decision RC Mgr are closest to the point of decisionImproves speed of decision less intervention by HQ

HQ is relieved of day-to-day decisions making process canconcentrate on more strategic decisions

Provides training ground for general mgt. as RC s acts as mini Cos .

Enhances profit consciousness with every expense made .(mktg. mgr. will tend to authorize promotionalexpenditure which increases the sales).

Provides best performance indicators of Co s individual component.Since output is clear cut evident, it evokes competition.Ensures better and safer delegation of authority.Ensures better motivation and evokes commitment.



Profit Centre Dis-AdvantagesCaliber of RC mgr. may hamper the decision.Incase of more integrated company there may be problems of cost sharing,

transfer pricing, sharing credit for revenue.Divisionalisation may impose additional cost of admn/support units.Functional set up may not have competent of GM to manage RC.Functional units once cooperated may now be in competition with one another-

(as profit of one is loss to another).May encourage short term motive at the expense of Co s overall goal.Optimization of RC s profit not necessarily mean optimization of company s

profits.Decentralization makes top mgt. to rely more on MC reports

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Profit Centre imp