Question

In Unit 3 (specifically chapter 22), we look at measuring the performance of a profit center. To do this, we have to allocate the various indirect costs and service department costs to the profit centers to better gauge their profitability. However, by doing so, we attribute many costs that are not directly controlled by the unit's management (i.e. depreciation, advertising, etc.).

• In these cases, why is it important to still allocate these costs?
• At what level of management should these costs be relevant when determining that manager's performance?
• What would be a better way to evaluate the unit manager's performance?

Answer 1

Allocation of different unit cost is very much necessity to come to conclusion about the actual profits which the unit's management earns.

In this case, there are various costs which are attributed to profit centres which are not directly controlled by the unit management. Such cost are depreciation, advertisement expenses, etc.

These costs are important to be allocated to various profit centres as these are indirect cost and cannot be directly allocated, so they are indirectly allocated to various profit centres to gauge their profitability.

These costs up to a certain level be considered relevant when determining the managers performance, as these costs are not in the hands of the unit manager and he cannot control these costs.
So, managers performance should be determined only aftet allocating these indirect costs to profit centres.
A better way to evaluate unit managers performance would we evaluate his performance before considering indirect costs to profit centres.