Unit-III Responsibility Centers

Introduction: Responsibility Centers (RCs) constitute

the structure of a control system and the assignment
of responsibility to organizational sub-units must
reflect the organizations strategy. In this unit we
review the considerations involved in assigning
financial responsibility in terms costs, revenue, profit
and assets to organizational sub-units.
The nature RCs in general and the criteria of
efficiency and effectiveness that relevant in
measuring the performance of their managers.
A RC is an organization unit that is headed by a
manager who is responsible for its activity.
Continued.
Broadly, there are two types of
centers.
RCs

Revenue
Centers Expenses
Centers

Engineered
Centers
Discretionary
Centers

A & S Centers R&D Centers Marketing Centers

Continued..
The core operation of RCs receive I/P, in the
form of materials, labor and services. Using
working capital (inventory receivables),
equipment , and other assets, the RCs
performs its particular function, with the
objective of transforming its I/P into O/P either
tangible goods or intangible services).
In a production plant, the outputs are goods, in
staff units such as HR, Transportation,
Engineering., accounting the outputs are
services. This is the nature of RCs.
Continued..
Relationship between input and
output.
Work
Inputs Output
(Resources used, measure (Goods or Services)
by costs)
Revenue Center
In a revenue center, output (i.e.,
revenue) is measured in terms, but
no formal output is made to relate
input (i.e., expenses or cost) to
output. Typically revenue centers are
marketing/sales units. Actual sales
are measured against budgets or
quotas, for identification
performance.
Expense Centers
ECs are responsibility centers whose inputs are
measured in monetary terms, but whose output are
not. Further ECs, there are 2 types: engineered and
discretionary.
Engineered costs are those for which the right of
proper amount can be estimated with reasonable
responsibility. Example: Factorys cost: Direct material,
direct labor, components, supplies, and utilities.
Discretionary costs also called managed costs are those
for which no such engineered estimate is feasible. In
discretionary expenses centers, the cost incurred depend
on managements judgment as to the appropriate
amount under the circumstances.
Administrative & Support
Centers:
ACs include senior corporate management
and business unit management, along with
the managers of supporting staff units.
Support centers are units that provide
services to other responsibility centers.
Control problems: The control of
administrative expenses is especially
difficult of
Difficult in measuring output
Lack of Goal Congruence
 Continued.
Difficult in measuring Output: Some staff activities, such
as pay roll accounting, are so routinized. In other activities,
however, the principal output is advice and service-functions
that are virtually impossible to quantify much less evaluate.
Since output cant be measured.
Lack of Goal Congruence: Typically, managers of
administrative staffs strive for functional excellence. These
staff office may want to develop the ideal systems
program, or function, the ideal may be costly relative to the
additional profits. And senior management is in close
personal contract with staff units and can determine from
personal observation what they are doing. Due to this, lack of
goal congruence, it is difficulty to measure their performance
Support Centers
Support Centers often charge other responsibility centers
for the services that they provide. For example, the
management information services department may charge
others for computer services.
Budget preparation: The proposed budget for an
administrative or support center usually consists of a list of
expense items, with the proposed budget being compared
with the current years actual expenses. These additional
sections are clearly worthwhile only if the budget is large
and/ or management wishes to determine the proper
extent of the centers activities. In other situations, the
amount of detail depends on the importance of the
expenses and the desires of management.
 Research & Development
Centers:
Control Problems: The control of R&D centers presents
its own characteristics difficulties, in particular, difficulty
in relating results to inputs and lack of goal congruence.
Difficulty in relating Results to Inputs: The results
of Research and Development activities are difficult to
measure quantitatively. In contrast to administrative
activities, R&D usually has at least a semi-tangible
output in the form of patents, new products, or new
processes; but the relationship of output to input is
difficult to appraise on an annual basis because the
completed product of an R&D group may involve several
years of effort. Thus, inputs an stated in an annual
budget may be unrelated to outputs.
 Continued..
Lack of Goal Congruence: The goal congruence problem in R&D
centers is similar to that in administrative centers. The research
manager typically wants to build the best research organization,
money can buy, even though that may be more expensive than
the company can afford. A further problem is that research people
often do not have sufficient knowledge of the business to
determine the optimum direction of the research efforts.
The R&D Continuum: The activities conducted by R&D
organizations lie along a continuum, with basic research at one
extreme and product testing at the other. Basic research has two
characteristics. (1) It is unplanned, (2) there is often a significant
time lapse between the initiation of research and introduction of a
successful new product.
Ex: Biotechnology field nearly 26 years elapsed from the time Watson and
crick defined the structure of the DNA Molecule
R&D Program:
There is no scientific way of determining
the optimum size of an R&D budget many
companies use a % of average revenues as
a base. R&D program consists of list of
programs and it is usually review annually
by senior management (CEO, Research
Director, functional heads). This committee
makes broad decisions as to which projects
to undertake, which to expand, which to
cutback on, and which to discontinue.
Annual Budgets
If a company has decided on a long-range
R&D program and has implemented this
program with a system of project approval,
the preparation of the annual R&D budget is
a fairly simple matter, involving mainly the
Calenderization of the expected expenses
for the budgeted period. The annual budge
process also ensures that actual costs will
not exceed budgeted amounts without
managements knowledge.
Measurement of
Performance
Usually monthly or quarterly, most companies
compare actual expenses with budgeted expenses for
all responsibility centers and ongoing projects.
In many companies, management receives two types
of financial reports on R&D activities.
I) The latest forecast of total cost with the approved
amount for each active project
2) Comparison between budgeted expenses and actual
expenses in each responsibility centers.
Its main objective is to help research executives anticipate
expenses and make sure that expense commitments are
being met. On the other hand, however, that managements
primary tool in evaluating effectiveness is face-to-face
discussion.
Marketing Centers
In many companies 2 different types of activities are
grouped under the heading of marketing, with different
controls being appropriate for each: one is logistic
activities/order filling, other one is marketing activities/order
getting activities.
Logistics Activities: Logistic activities are those involved in
moving goods from the company to its customers and
collecting the amounts due from customers in return. These
activities include transportation to distribution centers,
warehousing, shipping and delivery, billing and the related
credit function, and the collection of accounts receivables.
In most companies, the paper work involved in filling
orders and collecting receivables is now accomplished
quickly and at low cost by using the internet.
Marketing activities:
These activities are those to obtain orders for
company products. These activities include test
marketing; the establishment, training and
supervision of the sales force; advertising; and
sales promotion. To measure a marketing
organizations output, evaluating the more
difficult, because changes in factors beyond the
marketing departments control (eg. Economic
conditions or the actions of competitors). There is
often a reasonably good correlation between sales
volume and the level of sales promotion and
advertising expenses.
 Continued..
Many companies budget marketing expenses as a percentage
of budgeted sales, but they do not because sales volume
causes marketing expenses, but rather on the belief that the
higher the sales volume, the more the company can afford to
spend on advertising.
In summary, there are 3 types of activities within a marketing
organization, and consequently, 3 types of activity measures.
First- Order-filling/logistics activity many of whose cost are
engineered expenses
Second- Generation of revenue, which is usually evaluated by
company actual revenue and physical quantities sold with budged
revenue and budgeted units, respectively.
There are getting orders, which are discretionary because no one
knows what the optimum amounts should be. Consequently, the
measurement of efficiency and effectiveness for these costs is highly
subjective.
Profit Centers:
When a responsibility centers financial performance
is measured in terms of profit (i.e., by the difference
between the revenue and expenses) the center is
called a profit center.
It is one of useful performance measure since it
allows senior management to use one
comprehensive indicator rather than several.
In this, we discuss the considerations involved in
deciding whether to establish a profit center in the
first place, next the term business units and (P)
centers later production and marketing functions
can be constituted as (P) centers.
General Considerations:
A functional organization is one in
which principal manufacturing or
marketing function is performed by a
separate organization unit.
Each functional units are termed
divisionalization. To delegate more
authority to operating managers.
Although the degree of delegation
may differ from company to company.
Continued.
In a survey of fortune 1,000 companies in the US,
of the 638 usable responses, 93% were from
companies that included 2/more profit centers.
Example: Nokia corporation, the worlds No:1
producer of mobile phones, faced considerable
slowdown in sales in 2001.
As part of the turn around strategy, on May 1 st, 2002,
Nokia Corporation split its $21 billion mobile phone
unit into 9 Profit centers, each unit with responsibility
for a specific market segment. The new (P) Centers
were set up to allow Nokia to focus effectively on each
global niche and there by achieve faster sales growth.
Advantages:
1) The quality of decisions will be taken by managers because
closest to the point of decision.
2) The speed of operating decisions, no need consult with Head
Quarter.
3) HQs, can concentrate on broader issue relieved of day-to-day
decision making.
4) (P) centers are similar to independent companies they provide an
excellent training ground for general management.
5) (P) consciousness is enhanced since managers who are
responsible for profits will constantly seek ways to increase them.
6) (P) Centers provide top management with ready-made
information on the (P) of the companies individual components.
7) (P) centers are particularly responsive to pressure to improve
their competitive performance.
Difficulties
1. Decentralization decision making will force top management to rely
more on management control reports than on personal knowledge,
some times may loss of control.
2. The quality decisions made at the unit level may be reduced.
3. Friction may increase because of arguments over the appropriate
transfer price
4. There is competition with one another. An increase in profits for one
manager may mean a decrease for another.
5. Divisionalization may impose additional costs because of the
additional management staff personal and record keeping required.
6. There may be too much emphasis on short run profitability at the
expenses of long-run profitability.
7. There is no completely satisfactory system for ensuring that
optimizing the profits of each individual (P) centers will optimize the
profits of the company as a whole.
Other Profit Centers:
Functional Units: Multi-business
companies are typically divided into
business units, each of which is
treated as an independent profit-
generating unit. The subunits within
these business units, however, may
be functionally organized. It is
sometimes desirable to constitute
one or more of the functional units-
e.g., marketing manufacturing, ad
(I) Marketing:
A marketing activity can be turned into a (p)
center by charging it with the cost of the
products sold. This transfer price provides the
marketing manager with the relevant
information to make the optimum revenue, ad
the standard practice of measuring a (p) centers
manager by the centers (p) provides a check on
how well these trade off have been made. The
transfer price charged to the profit center should
be based o the standard cost, rather than the
actual cost, of the products being sold.
(II) Manufacturing:
The manufacturing activity is usually an expense center, with the
management being judged on performance versus standard costs
ad overhead budgets. This measure can cause problems,
however, since it does not necessarily indicate how well the
manager is performing all aspects of his job
Example:
A manager may skimp on quality control, shipping products of inferior
quality in order to obtain cost credit.
A manager may be reluctant to interrupt production schedules in order
to produce a rush order to accommodate a customer
A manager who is measured against standards may lack the incentive to
manufacture products that are difficult to product-or to improve the
standards themselves.
Some authors maintain that manufacturing units should not be made into
(p) centers unless they sell a large portion of their output to outside
customers.
Service & Support units:
Units for maintenance, information
technology, transportation, engineering
consulting, customer service, ad similar
support activities can all be made into profit
centers. These may operate out of HQ and
service corporate divisions, or they may fulfill
similar function within business units. They
charge customers for services rendered, with
the financial objectives of generating enough
business so that their revenues equal their
expenses
Measuring Profitability:
There are two types of profitability
measurements used in evaluating a profit
centers
I) Measure of management performance: It
is focus on how well the manager is doing.
This measure is used for planning,
coordinating and controlling the (p) centers
II) measure of economic performance: It is
focus on how well the (p) center is doing as
an economic activity.
 Types of profitability
measures:
The performance of the (p) center manager, however,
may be evaluated by five different measures of
profitability.
I) Contribution margin: It reflects the spread between
revenue ad VC. Fixed expenses are beyond their
control, managers should focus their attention on
maximizing contribution.
II) Direct (p): It reflects a (p) centers contribution to the
corporation. It incorporates all expenses within the (p)
center managers control.
III) Controllable (p): HQ expenses can be divided into 2
categories: controllable ad non-controllable. The former
category includes expenses that are controllable at
least to a degree, by the business unit manager- has to
be controlled for increasing the (p).
 IV) Net Income: Here, companies measure the performance of domestic
centers, the amount of net income after income tax. There are two
principal arguments.
A) After tax income is often a constant % of a pre-tax income- no
advantage to the company
B) Since may of the decision that affects Income tax are made at HQs,
it is not appropriate to judge (p) Center managers on the
consequences of these decisions.
V) Revenue: Choosing the appropriate revenue recognition method
is important revenues be recorded when an order is made
The above measuring (p) of (p) center manager vary organization to
organization. Evaluating manager performance vary firm to firm. But
even the best variance analysis system will still require the exercise of
judgment, ad one way to made this judgment more reliable is to
eliminate all items over which the manager has to influence.
 Transfer Pricing
To-days organizational thinking is oriented toward
decentralization.
One of the principal challenges in operating a
decentralized system is to devise a satisfactory
method of accounting for the transfer of goods ad
services from one (p) center to another in
companies that have a significant number of these
transactions.
In this topic we discuss various approaches to
arriving at transfer prices for transactions between
(p) centers ad the system of negotiation is
essential when transfer prices are used
Objectives:
If 2/more (p) centers are jointly
responsible for product
development, manufacturing
and marketing, each should
share I the revenue generated
when the product is finally sold.
The transfer price is the
mechanism for distribution this
revenue.
Continued
I) It should provide each business unit with the relevant
information it needs to determine the optimum trade-off
between the optimum trade-off between company costs
ad revenues.
II) It should induce goal congruent decisions-i.e., the
system should be designed so that decisions that improve
business unit profits will also improve company profits.
III) It should help measure the economic performance of
the individual business units.
The system should be simple to under stand ad easy to
administer.
Designing transfer pricing systems is a key management
control topic for most corporations.
Meaning & Fundamental
Principle
Transfer of goods and services between
responsibility centers.
The TP (Transfer price) should be similar
to the rice that would be charged if the
product were sold to outside customer or
purchased from outside vendors.
Govindarajan Survey:
No. of usable responses 638
Companies with 2/more (p) Centers 593
Transfer products between (p) Centers 470
Methods:
Market Price: The ideal transfer price is based on well-established, normal
market price for the identical product being transferred. Managers should
be interested in the long-run as well as the short-run performance of their
responsibility centers. Staff people involved in negotiation of transfer
prices. Managers must know about the available alternatives and the
relevant costs and revenues of each. There must be a smoothly working
mechanism for negotiating contracts between business units.
Freedom to source- Managers should be permitted to choose the
alternative that is in their own best interest. The buying manager should
be free to buy from the outside, and the selling manager should be free to
sell outside. If buyers cant get a satisfactory price from the inside source,
they are free to buy from the outside.
This method is optimum if the selling profit center/buying center can obtain all of
its requirements from either insiders or outsiders may be complex to calculate and
the results less satisfactory than market based price.
2 decisions must be made in a cost-based transfer price system:
How to define cost and
How to calculate the profit mark-up
Cost Basis
The usual basis is standard costs.
Actual costs should not be used
because production inefficiencies will
be passed on to the buying (P)
center. If standard costs are used, an
incentive is needed to set tight
standards and improve standards.
Profit-Mark-up:
In calculating the (p) mark-up, there
also are two decisions.
(i) Profit mark-up is based on percentage
of costs or percentage of investment.
(ii) Profit allowance is the amount of
profit, the rate of return that would be
earned if the business unit were an
independent company, calculation of a
profit at a standard level.
Up Steam fixed costs and
profits:
TP can create a significant problem in
integrated companies. The (p) center that
finally sells to the outside customer may not
even be aware of the amount of upstream
fixed costs and profit included in its internal
purchase price.
Even if the final (p) center were aware of
these costs and profit, it might be reluctant.
Its own profit to optimize company profit.
Methods that companies use to mitigate this
problem are described below:
Continued
1-Agreement among business units
2-Two-step pricing
1.Some companies establish a formal mechanism where
by representatives from the buying and selling units
meet periodically to decide on outside selling prices and
the sharing of profits for products with significant
upstream fixed cost and profit.
2. Another way to handle this problem is to establish a
TP that includes two changes. First, for each unit sold, a
change is made that is equal to the standard variable
costs of production. Second, a periodic (usually
monthly) charge is made that is equal to the FC
associated with the facilities reserved for the buying
unit. Following are some point to consider about the 2
steps pricing method.
Continued
The monthly charge for fixed costs and profit should
be negotiated periodically and will depend on the
capacity reserved for the buying unit.
Under this system, the manufacturing units profit
performance is not affected by the sales volume of
the final unit.
There could be a conflict between the interests of the
manufacturing unit and those of the company.
This method is similar to that take or pay pricing
that is used frequently by public utilities, pipelines,
and coal mining companies, and in other long-term
contracts.
Profit Sharing:
If the 2 step pricing system just described is
not feasible, a (p) sharing system might be
used to ensure congruence between
business unit and company interests. This
system operates as follows:
1) The product is transferred to the marketing
unit at standard VC.
2) After the product is sold, the business units
share the contribution earned, which is the
selling price minus the variable manufacturing
and marketing costs.
Two-sets of Prices
In this method, the manufacturing units
revenue is credited at the outside sales price
and the buying unit is charged the total
standard costs. The difference is changed to a
HQs account and eliminated when the business
unit statements are consolidated.
This transfer pricing method is sometimes used
when there are frequent conflicts between the
buying and selling units that cant be resolved
by one of the other methods. Both the buying
and selling units benefits under this method.
 Pricing corporate services
The cost of central service staff units over
which business units have no control.
Example: Central Accounting, public
relations and administration. The allocations
are not transfer price. There are 2 types of
TP.
1) For central services that the receiving unit
must accept but can at least partially control the
amount used.
2) For central services that the business unit can
decide whether or not to use.
Control over amount of
service:
Business units may be required to use company
staffs for services such IT and R&D. In these
situations, the business unit manager cant control
the efficiency with which these activities are
performed but can control the amount of the service
received. There are three school of thought.
i) To pay standard variable cost of the discretionary
services.
Ii) Standard VC + Fair share of standard FC that is, the full
cost
Iii) Equivalent to the market price/to standard full cost+
profit margin.
Continued.
Optimal use of services: In some case,
management may decide that business units
can choose whether to use central
service/service from out side, develop, their
own capability.
Simplicity of the price mechanism: In this
computer experts are accustomed to dealing
with complex equation, and the computer
itself provides information on the use made of
it on a second-by-second basis and at low
cost.
 Administration TP
For administration the TP has to be fixed based on
negotiation, arbitration, resolution and product
classification.
Negotiation: In most companies business units
negotiate TP with each other, i.e., TP are not set by
a Central staff group perhaps, the most important
reason for this is the belief that establishing selling
prices and arriving at satisfactory purchase prices
are aiming the primary functions of line
management. A negotiate price often is the result
of compromises made by both buyer and seller.
Arbitration and conflict
resolution:
Some instances in which units will not be
able to agree on a price. In this situation,
the responsibility for arbitrating disputes
is assigned to a single executives-the
Financial Vice President or Executive VP,
for example-who talks to business unit
managers involved and then orally announces
the price. The other extreme is to set up a
committee. It has to effect on business units
profits.
Product classification:
Some companies divide products into 2
main classes.
Class 1: All products for which senior
management wishes to control sourcing.
These would be normally be large volume of
products, not outside source exists.
Class 2: Other products, these are products
that can be produced outside the company
and small volume. For these products both
buying and the selling units are free to deal
either inside or outside the company.
 Measuring and Controlling Assets
Employed
In some business units, the focus on profit as measured by
the difference between revenue and expenses.
In other business units, profit is compared with the assets
employed in earning it.
We refer latter group of responsibility center as investment
center. In the real world companies are the term (p) center,
rather than investment center. Investment center is a
special type of profit center. In this so many problems
involved in measuring the assets employed.
The principal types of assets may be employed in an
investment center. The sum of these assets is called the
investment base. The investment base:
The percentage of R on Investment, referred to as ROI
EVA
 Structure of the Analysis
The purpose of measuring assets employed are
analogous to the purpose.
To provide information that is useful in making
sound decisions about assets employed and to
motivate manager to make these sound
decisions that are in the best interest of the
company.
To measure the performance of the business
unit as an economic activity.
There are 2 Techniques uses relating profits to
assets employed namely;
Two Techniques:
Return on Investment Ratio: It is the
relationship between income and assets employed.
Income is numerator Net profit reported on the
income statement and denominator will be taken
as assets employed as the corporation equity in
the business unit/to tal assets-CL.
Economic Value Added (EVA): It is a amount
rather than a ratio. It is found by subtracting a
capital charge from the net operating profit. This
capital charge is found by multiplying the amount
of assets employed by a rate EVA is conceptually
superior to ROI
Measuring Assets Employed
Measuring Assets, to evaluate
investment managers, HQ asks 2
questions:
Usage of Assets efficiently and to
acquire the proper amount
What practices best measure the
performance of the unit as an economic
entity?
Measuring Assets:
Cash: Business unit cash balances may well be only the
float between daily receipts and disbursements. Actually,
the business unit required actual cash balances to be much
smaller than would be required. Ex: General motors was
reported to 4.5% of annual sales.
Receivables: Business unit managers can influence the level
of receivables directly. Always investment in a accounts
receivables return is higher than the cost of receivables. On
the other hand, it is possible reinvest the money for
collection of accounts receivables.
Inventories: Measuring inventories is also very important by
the end of the period for financial accounting purpose, a
difference valuation methods usually is used for business
unit it may be LIFO, FIFO or WAM.
Continued
Working Capital: As you know that WC the
difference between CA and CL. It is very
important to meet the day to day expenses. The
unit manager expects a good measure of the
capital provided by the corporation, on which it
expects the business unit to earn a return.
Property, Plant and Equipment: In FAs are
initially recorded at their acquisition cost. Most
of the companies use a similar approach in
measuring profitability of the business unit. In
that some serious problems:
Problems:
1. From time to time acquisition of new equipment in order
to get required rate of return.
2. Return on investment calculated on Gross Book Value. But
it always understates the true return (Gross Book Value)
3. Disposition of Assets: If a new machine being
considered to replace an existing machine that has some
underappreciated book value. The relevant amount of
additional investment is understated, and the economic
value added is corresponding overstated.
4. Annuity Depreciation: If depreciation is determined by
the annuity, rather than the straight-line, method, the
business unit profitability calculation will show the correct
economic value added and return on investment.
 Continued.
Other Valuation Methods: Some companies use not book value set
a lower limit. Other companies are use the assets approximate current
value, periodically appraising assets.
Intangible assets: Some companies tend to be R&D intensive, other
tend to be marketing intensive. There are advantages to capitalizing
intangible assets such as R&D and marketing and then amortizing
them over a selected life.
Non-Current Liabilities: A business unit receives its permanent
capital from the corporate pool of funds. From debt & Equity and
retained earnings. The total amount of these funds is relevant. These
funds has to be used for the development purpose rather than
manufacturing.
Capital Charge: Corporate HQs sets the rate used to calculate the
capital charge. It should be higher than the corporations rate for debt
financing because the funds involved are a mixture of the debt and
higher-cost equity. It is below the companies estimated cost of capital
so that the economic value added of average business unit will be
above zero.
 EVA Vs. ROI
Most of the companies employing
investment centers evaluate
business units on the basis of ROI
rather than EVA. There are three
apparent benefit of an ROI Measure.
1) Any thing that Financial Statements is
reflected in this ratio
2) It is simple to calculate, easy to
understand
3) It is applied to any organization unit
Economic Value Added
(EVA)
Some inherent advantages.
1) EVA has to highlighting comparable profit objective in
investments.
2) EVA be economically attractive to the manager, than ROI. Ex:
ROI 30% in the last year as a result increasing the investment
due to this decrease overall ROI, but EVA calculate excess of the
K will increase EVA and what is the benefit of organization.
3)EVA is that different interest rates may be used for different
types of assets where ROI highlights on an average ROR.
4) EVA has a stronger positive correlation with changes in the
companys market value. It has to give much more importance
for how to increase the maximization of shareholders value.
EVA= Net Profit-Capital charge.
EVA=ROI-K
It helps:
Increase in ROI through business process
re-Engineering and productivity gains.
Divestment of assets, products and/or
business whose ROI is less than the K
Aggressive new investments in assets
and products and business whose ROI is
higher than K.
Increase in sales, (p) margins or capital
adequacy and decrease in K%
 Additional consideration in
Evaluating managers:
Strongly advocate the use of EVA as a performance
measurement tool, but EVA doesn't solve all the
problems of measuring (p) in an investment center, like
gross book value, problem of account for FA, annuity
depreciation etc.
Considering these problems, some companies have
decided to exclude FAs from the investment base. The
Head Quarter will control FAs by separate device.
Business unit manager focus on day-to-day decision
that affect the level of these assets.
Investments in FAs are controlled by capital budgeting
process. Hence, at the time of evaluation performance
of manager the above problems will not taken into
consideration.
Evaluating Economic Performance
of the Entity
This topic refers measuring the performance of
business unit managers on Economic
performance. It is quite difference management
reports are prepared monthly/quarterly
whereas economic performance reports
prepared irregular intervals, usually once every
several years. Management Reports tend to use
historical reports on actual costs incurred
whereas Economic Reports on actual costs
incurred whereas Economic Reports use quite
different information.
These are:
ERs are a diagnostic instrument
Evaluate current strategies are satisfactory or not
The economic analysis are current plans for new
products, new plant and Equipment new
strategies as a whole.
It is helpful for increasing the value of company as
a whole.
These reports highlighting attractiveness of the
business units and it also indicates contribution of
business unit to the companies total profitability.
Continued.
Economic analysis highlights break up
value i.e., a gap between current (p) and
breakup value and may need to be made. It
helps enhance future profitability.
Economic Reports focus on future (p) rather
than current/past profitability.
And Economic analysis, the value of
business unit is the present value of its
future earnings stream by estimating cash
flow at a required earning rate.