Profit Centre

‡ Profit is most comprehensive measure of performance ‡ Function/Activity having highest influence on Bottom Line suits best for Profit Center. ‡ Can be a Business Division or any of the functional unit ‡ Demands 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. Supplies ‡ Product Mix ‡ Selling Price ‡ Performance Measures ‡ Actual Profits ‡ Actual Profit in comparison with budgeted profits ‡ Typically used when ‡ RC manager has knowledge about correct price/quantity ‡ RC manager has knowledge to select optimal product mix CANDIDATES FOR PROFIT CENTER .

DaburCosmetics division etc. Wipro.Bath Soaps division. Coca-Cola.g. IBM. Foreign Marketing Center e. ± When centralized control is infeasible e. Honda India ‡ To Convert Marketing Division into Profit Center ‡ ‡ ‡ ‡ Charge cost of production to revenue center Grant of maximum autonomy to the unit Delegate sufficient authority Treat the unit as a mini company .g.g. Colgate. e. Microsoft.Business Unit as Profit Centre ‡ Business Units In a Decentralized Company Best suited as Profit Center ‡ Marketing Center as Profit Center ± Marketing Function having highest influence on Bottom Line.

Engineering Design Divisions Given greater autonomy.g. Service and Support Centre » e. Nirama Detergent ‡ To convert a Production Division in to Profit Center ‡ Credit selling price less marketing expenses to production division ‡ 3. Maintenance. Customer Service.Functional Unit as Profit Centre ‡ Manufacturing Division ± When Cost of production having highest impact on Bottom Line and ± When Marketing Function is relatively insignificant » e. helps them to cut cost and make its operations more efficient . Transportation.g.

e.g. Net Profit Before taxes Less Income tax Fixed Cost is beyond control of PC All Expenses incurred at the behest of PC Justification Some HQ expenses exclusively incurred for given PC at HQ IT services Common unavoidable expenses incurred to run a company . Contribution Margin Less Fixed Expenses 2. financing and tax planning activities are carried at HQ In some cases RC do have impact on tax liability of the company Tax Heavens 5. Net Profit . & Marketing 1.Profit Centre Performance Measures ‡ Performance Measure Revenue Less VC of Mfg. All administration. Controllable Profit Less Other Corporate Allocations 4. Direct Profit Less Controllable Corporate Expenses 3.

Profit Centre . Ensures better motivation and evokes commitment. . Ensures better and safer delegation of authority. will tend to authorize promotional expenditure which increases the sales). mgr. as RC s acts as mini Cos . it evokes competition. Provides best performance indicators of Co s individual component. Since output is clear cut evident. ‡ ‡ ‡ ‡ ‡ (mktg.Advantages ‡ Improves quality of decision RC Mgr are closest to the point of decision ‡ Improves speed of decision less intervention by HQ ‡ HQ is relieved of day-to-day decisions making process concentrate on more strategic decisions can ‡ Provides training ground for general mgt. Enhances profit consciousness with every expense made.

may hamper the decision. Functional set up may not have competent of GM to manage RC. transfer pricing. to rely more on MC reports . Functional units once cooperated may now be in competition with one another(as profit of one is loss to another). Divisionalisation may impose additional cost of admn/support units. Optimization of RC s profit not necessarily mean optimization of company s profits. May encourage short term motive at the expense of Co s overall goal. sharing credit for revenue. Decentralization makes top mgt. Incase of more integrated company there may be problems of cost sharing.Profit Centre Dis-Advantages ‡ ‡ ‡ ‡ ‡ ‡ ‡ ‡ Caliber of RC mgr.

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