Question

Looking at measuring the performance of a profit center. 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

1) Profit center is responsible for several functions like (a) generate profit, (b) compute return on investment, (c) budgetary control etc. For these reasons certain uncontrolled expenses must have to be deducted from the revenue to find out ultimate net profit. With out considering such , is not possible to find out the actual performance of the departments. Indirect expenditures are also crucial expenditure, without consideration of the effects of such actual profit earned, return on investment or budgetary control can't be accurately ascertain .

2. Management performance can be evaluated by knowing the net profit of the business, percentage of return on investment . Decision can be taken on the above facts and findings about management performance .

Basically in two levels these costs are relevant to determine managers performance  (a) A department within the organization (b) A strategic unit of a big organizations .

3) Profit center as a strategic unit of a big organizations is better to evaluate the performance of a unit manager. A Bar is may be the profit center of the whole hotel and the profit of the Bar is determining the performance of the Bar unit manager.