profit and cost centers

responsibility centers

1. Cost Center • manager has control over which costs are incurred - Ex: department supervisor in a factory 2. Profit Center • Manager has control over the generation of revenues and costs - Ex: Store manager for fast food franchise 3. Investment Center • manager has control over revenues, costs, and amounts invested - Ex: manager of the Chinese operations of a large U.S. multinational company

cost variance

A difference between the actual cost and the budgeted cost. (the manager is responsible for taking corrective action to eliminate the variance.)

Segment Margin

A number that includes both revenue and costs, is something we'll call Segment Margin • Sales - Variable Costs = contribution margin • then contribution margin - direct or controllable fixed costs = Segment Margin

segment margin statement

A profit and loss statement that identifies costs directly chargeable to a segment and further divides them into variable and fixed cost behavior patterns.

decentralized company

An organization in which managers at all levels have the authority to make decisions concerning the operations for which they are responsible.

profit center

An organizational unit in which a manager has control over and is held accountable for both cost and revenue performance. Profit centers are usually found at higher levels in an organization than are cost centers.

cost center

An organizational unit in which a manager has control over and is held accountable for cost performance.

investment center

An organizational unit in which a manager has control over and is held accountable for cost, revenue, and asset performance.

responsibility center

An organizational unit in which a manager has control over and is held accountable for its performance.

operating capital

Funds available for use in financing the day‑to‑day activities of a business.

segments l

Parts of an organization requiring separate reports for evaluation by management.

segment margins

The difference between segment revenue and direct segment costs; a measure of the segment's contribution to cover indirect fixed costs and provide costs; in effect, the operating profit created by the segment.

segment-margin ratios

The segment margin divided by the segment's net sales revenue; a measure of the efficiency of the segment's operating performance and, therefore, its profitability (segment margin divided by net sales).

segment margin statement first level

this is the 1st level on the chart - top management - When viewing this segment margin statement, keep responsibility accounting in mind—remember that segment managers should be evaluated on only the items they can control or influence. In evaluating profit centers, it is important that managers be held responsible only for controllable costs and not for noncontrollable costs. The costs over which they have control are usually called direct costs. - subtract the Net Sales Revenue by the segment margin to get the segment ratio

There are two important behavioral considerations in assigning responsibilities to managers.

1. responsible manager should be involved in developing the plan for the unit over which the manager has control. 2. a manager should be held accountable only for those costs, revenues, or assets over which the manager has substantial control.

Given that the segment margin statement was prepared in light of the principles of controllable and direct costs, how does management use the information it contains?

1. the operating profit figure provides management with concrete information for evaluating the performance of the company as a whole 2. the segment margins enable management to analyze company results by evaluating the performance of each segment.

Segment Margin Statement: Middle Level

Costs like the division manager's salary and advertising for all regions are not controlled by the region manager and so are not allocated to the regions. Moving down the organizational hierarchy, from divisions to geographic regions to countries, indirect costs increase in total; managers at the lower levels have the narrowest range of responsibility and the fewest costs to control.

indirect costs

Costs normally incurred for the benefit of several segments or activities; sometimes called common costs or joint costs.

controllable cost

Costs over which a manager has direct authority and can change.

noncontrollable cost

Costs over which a manger does not have direct authority and cannot change.

direct cost

Costs that are specifically traceable to a business unit or segment being analyzed.

Responsibility Accounting

is a system in which managers are assigned and held accountable for certain costs, revenues, or assets