Term
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Definition
| functional organization is converted into one where each major unit is responsible for both the mfg and mktg. |
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Term
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Definition
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Term
| Conditions to ensure before delegating profit responsibility |
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Definition
1. mgr should have access to relevant decision-useful information
2. should be some way to measure the effectiveness of the trade0offs mgr made |
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Term
| Adv of profit centers (8) |
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Definition
1. Decision quality improved
2. Speed of operating decisions increases
3. Hdqtrs is relieved of d-2-d responsibilities, can focus on broad.
4. Subject to fewer corp. constraints, allowing imagination and initiative
5. Training ground for GM
6. Profit consciousness enhanced
7. top mgmt can follow profitability to company components
8. competitive performance |
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Term
| Difficulties with profit centers (8) |
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Definition
1. decentralized decision making
2. decision quality may be reduced
3. friction around transfer pricing
4. competition rather than cooperating
5. impose additional costs of mgmt
6. hard to find competent GM's
7. too much emphasis on short term profitability
8. nothing ensures optimizing profits of the center will increase the company wide profits. |
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Term
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Definition
| business unit autonomy vs. corporate constraints |
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Term
| 3 types of decisions while managing a profit center |
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Definition
1. Product (what goods/services to market and sell?)
2. Marketing (how, where and for how much are these goods going to be sold?)
3. Procurement (how to obtain or manufacture the goods and services?) |
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Term
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Definition
| those that sell mainly to other business units |
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Term
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Definition
1. Marketing: when the mgr is in the best position to make trade-off decisions.
2. Manufacturing:
3. Pseudo
4. Service and support: maintenance, IT, transportation, engineering, consulting
5. Branch operations |
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Term
| 2 types of profitability measurements |
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Definition
1. management performance: how well the manager is doing as a manager
2. Economic performance: how well the profit center is doing |
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Term
| Main constraint from corporate management |
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Definition
| corporate service activities. ex. legal dept. |
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Term
| 3 problems with manufacturing profit center |
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Definition
1. manager may skimp on qc to obtain standard cost credit (ship prod. w/low quality.
2. mgr may be reluctant to interrupt production schedules in order to produce a rush order.
3. mgr who is measured against stds may lack incentive to manufacture difficult products |
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Term
| What is a profit center's economic performance always measured by? |
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Definition
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Term
| Ways to measure the performance of the manager (5) |
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Definition
1. Contribution margin
2. Direct profit
3. Controllable profit
4. Income before taxes
5. Net income |
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Term
1. Contribution margin
1 positive, 1 negative |
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Definition
Argument for: fixed expenses are beyond control, so this is a good measure of what they can control.
Problem: inaccurate, all fixed costs are controllable to some extent |
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Term
2. Direct profit
1 negative |
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Definition
Contribution to general OH and profit of the corporation. incorporates all expenses except those incurred at HQ.
Weakness: does not recognize the motivational benefit of charging HQ costs. |
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Term
3. Controllable profit
1 negative |
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Definition
HQ expenses are controllable (mgr has some influence on) and non controllable.
Disadvantage: excludes non-controllable, it cannot be directly compared with either published data or trade association data. |
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Term
4. Income before taxes
3 positive, 2 negative |
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Definition
All corporate OH is allocated to profit centers based on relative amount of expenses incurred. Allocation based on budgeted, not actual.
Arguments against:
1. Since these are not controllable by mgmt, they should not be held accountable.
2. May be difficult to allocate in a manner that properly reflects what was actually incurred.
Arguments in favor:
1. Keeps corporate spending in check, managers are questioning corporate spending/costs.
2. performance of each profit center will become more comparable to competitors who pay for similar services.
3. When managers know all costs will affect their profit, they are motivated to make l-t marketing decisions that benefit the company as a whole |
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Term
5. Net income
2 positive, 2 negative |
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Definition
Bottom line
Arguments against:
1. After tax is often a constant percentage of before tax, no need to incorporate taxes.
2. Many decisions that affect tax are made at HQ.
Arguments for:
1. Effective tax rate does vary, especially if there are foreign ops
2. Some profit centers maximize deductions |
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Term
| Revenues (2 difficulties) |
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Definition
1. Choosing the appropriate revenue recognition model
2. Allocation of a common revenue among more than one profit center |
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