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    Profit Centers: Prepared By: Nilesh Shah Hajimohammed Pipadwala Nirmal Rajpurohit Ravikant Sharma Rupesh Thakor

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    Bohra Nilesh
    - A profit center is a responsibility center where financial performance is measured in terms of profit, which is the difference between revenue and expenses. - When major units in a company are responsible for both manufacturing and marketing, it is termed "divisionalization" and the units often function as profit centers. - Profit centers give managers control over both inputs and outputs as well as freedom over pricing, product mix, and other decisions that influence profits.

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    Profit Centers: Prepared By: Nilesh Shah Hajimohammed Pipadwala Nirmal Rajpurohit Ravikant Sharma Rupesh Thakor

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    Bohra Nilesh
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    - A profit center is a responsibility center where financial performance is measured in terms of profit, which is the difference between revenue and expenses. - When major units in a company are responsible for both manufacturing and marketing, it is termed "divisionalization" and the units often function as profit centers. - Profit centers give managers control over both inputs and outputs as well as freedom over pricing, product mix, and other decisions that influence profits.

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    - A profit center is a responsibility center where financial performance is measured in terms of profit, which is the difference between revenue and expenses. - When major units in a company are responsible for both manufacturing and marketing, it is termed "divisionalization" and the units often function as profit centers. - Profit centers give managers control over both inputs and outputs as well as freedom over pricing, product mix, and other decisions that influence profits.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    35 views14 pages

    Profit Centers: Prepared By: Nilesh Shah Hajimohammed Pipadwala Nirmal Rajpurohit Ravikant Sharma Rupesh Thakor

    Uploaded by

    Bohra Nilesh
    - A profit center is a responsibility center where financial performance is measured in terms of profit, which is the difference between revenue and expenses. - When major units in a company are responsible for both manufacturing and marketing, it is termed "divisionalization" and the units often function as profit centers. - Profit centers give managers control over both inputs and outputs as well as freedom over pricing, product mix, and other decisions that influence profits.

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    of 14

    Profit Centers

    Prepared by:
    Nilesh Shah
    Hajimohammed Pipadwala
    Nirmal Rajpurohit
    Ravikant Sharma
    Rupesh Thakor
    PROFIT CENTERS
     When a responsibility center’s financial performance is
    measured in terms of profit (i.e. By the difference between the
    revenue & expenses), the center is called a profit center.

    A functional organization is one in which each principal


    manufacturing or marketing function is performed by a separate
    organization unit. When such an organization is converted to
    one in which each major unit is responsible for both the
    manufacture and the marketing , the process is termed
    divisionalization.
    RC3-Profit Center
     Profit Centers are those RC which are responsible for profits.
    Managers have control over both inputs and outputs unlike the
    other two RCs. It does not have control over investments.
     Business Units In a Decentralized Company
    –Best suited as Profit Center
     Marketing Center as Profit Center
    –Marketing Function having highest influence on Bottom Line,
    •e.g. Colgate, Coca-Cola, Wipro-Bath Soaps division, Dabur-
    Cosmetics division etc.
    –When centralized control is infeasible e.g. Foreign Marketing
    Center
    •e.g. IBM, Microsoft, Honda India
    Cont’d………
     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


    RC’s
    Cont’d………
     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
    General consideration
     Conditions for delegating profit responsibility
     Many management decisions involve proposal to

    Increase expense with the expectation of an even


    greater Increase in sales revenue.
    Ex. Additional ad expense. It involves trade off
    between expense and revenue.
     Two conditions should exist

    • Manager’s access to relevant information


    • Existence of some way to measure effectiveness of
    the trade-offs.
    Advantages of profit center
     Quality of decisions improve
     Speed of operating decisions
     Corporate level relieved of day to day expenses
     Managers are free to use their imagination and
    initiative
     Excellent training ground
     Profit consciousness
     Top management gets readymade information on
    profits
    Difficulties with profit center
     More reliance on management control reports than
    personal knowledge of everything
     if headquarters management is more capable or
    better informed than the profit center managers,
    then low quality decision making
     Friction due to appropriate transfer pricing and
    independency
     Internal competitions and therefore over self
    centered decisions
    Business Units as Profit Center
     Constraints on Business Unit Authority
    – Loose the benefit of size and synergy.
    – Constraints from other business units.
    •Required control over three decisions
    –Product decisions
    –Marketing decisions
    –Procurement decisions
    – Constraints from Corporate Management
    •Resulting from strategic consideration
    •Resulting because uniformity is required
    •Resulting from the economies of centralization
    Other Profit centers
     Examples of profit centers other than business units
    – Functional Units
    • Marketing
    • Manufacturing
    • Service and Support Units
    Measuring Profitability
     Management performance – how well the manager
    is doing.

     Economic performance – how well the profit center


    is doing as an economic activity.
    Types of profitability measures
     Contribution Margins
     Direct Profit
     Controllable profits
     Income before Taxes
     Net Income
     Revenues
     Management consideration
    Wrapping Up…
     It involves Judgments
     Choice of Revenue recognition
     Costs incurred in Profit center to Fully allocated
    corporate overhead
     Behavioral considerations

    INCLUDE THOSE EXPENSES AND


    REVENUES THAT A MANAGER CAN
    INFLUENCE.
    Thank You!

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