sneha mcs ppt

7/29/2019 Sneha Mcs Ppt

1/17

Profit Center v/s Investment Center

Presented by

Sneha Chavan: 08


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Cost, Profit, and Investments

Centers

Responsibility

Centers

CostCenter

ProfitCenter

InvestmentCenter


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Cost Center

A segment whose

manager has controlovercosts,

but not over revenues

or investment funds.


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Evaluation . . .

A cost center is evaluated by means of

performance reports (i.e., comparison of

actual with standard).


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Profit Center

A profit center is asubunit that hasresponsibility of

generating revenueand controlling costs.

Profit center evaluationtechniques include: Comparison of current

year income with atarget or budget.

Relative performanceevaluation comparesthe center with othersimilar profit centers.


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Responsibility Centers:

A Systems Perspective

Input OutputProcess

Control these

Profit Center


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Investment Center

An investment center is asubunit that is responsible for

generating revenue,controlling costs, and

investing in assets.

An investment center ischarged with earning incomeconsistent with the amount of

assets invested in thesegment.

Most divisions of a companycan be treated as either profitcenters or investment centers.


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Input OutputProcess

Control these

Investment Center

Responsibility Centers:

A Systems Perspective


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Profit Center Vs. Investment Center

A profit centeris focused on profits as

measured by the difference between

revenues and expenses.

An investment centeris compared with the

assets employed in earning revenues.


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Advantages of Profit Centers

Quality of many decisions is improved.

Profit consciousness may be enhanced.

Measurement of performance isbroadened.

Managers are freer to use their

imagination and initiative. It provides a training ground for general

management.


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Advantages of Investment Center

save money for your future

It is also like an independent business(common when an organization acquires

another organization e.g. Sears financialcenters).

money grows at a good rate when

compared to the inflation rate


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Disadvantages of Profit Centers

Top management may lose some control.

Lack of competent general managers.

Disadvantageous competition between

organization units. Friction can increase.

Too much emphasis on short-run profitability.

The quality of some of the decisions may bereduced.

Additional costs.

Di d t f I t t


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Disadvantages of Investment

Center

may lose money if you choose high risk

investment options.


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The Components of ROI

ROI has a distinct advantage over income

as a measure of performance since it

considers both income (the numerator)

and investment (the denominator).

ROI = Income

Investedcapital


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The Component of RI

Residual Income (RI) overcomes theunderinvestment problem of

ROI since any investment earning more

than the cost of capital will

increase residual income.

Residual Income = NOPAT

Required Profit

= NOPAT Cost of Capital x

Investment

= NOPAT Cost of Capital x (Total

Assets

Noninterest BearingCurrent Liabilities)


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Measuring ROI Income and

Invested Capital

ROI Income

Investment center income

will be measured using net

operating profit after taxes(NOPAT).

NOPAT should exclude

nonoperating items such

as interest expense and

nonoperating gains and

losses, net of the tax

effect.

ROI Invested Capital

Invested capital ismeasured as total assets

less noninterest bearingcurrent liabilities.

Noninterest bearingcurrent liabilities arededucted from total

assets because they area free source of fundsand reduce the cost of

the investment in assets.


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