Unit Refer to responsibility centers within an organization – it can imply departments,
divisions, companies (departments) etc
➢ It therefore may be appropriate to divide a company into separate self contained
units
Responsibility centers A unit within an organization where an individual manger is held responsible for the units
performance
➢ Allowing managers to operate within a certain level of autonomy
Autonomy Refers to the degree of freedom managers have in order to make decisions at a unit level
➢ DANAGER OF AUTONOMOUS LEVELS
- Is that individual managers might not pursue goals that are in the best interest
of the company as a whole
Goal Congruency Is achieved when managers of units make decisions in their own best interest and at the
same time act in the best interest of the organization as a whole
➢ Performance management systems are developed in line with the company’s
overall strategy and goals
➢ The aim is to use performance measures that will achieve goal congruency
, Responsibility centre
➔ There is 4 classifications
o You need to be able to classify based on info given in a scenario
Investment centre Profit centre Income centre Cost/expense centrre
(control of income
and cost)
Manager held responsible for Manager held responsible Manager held responsible Manager held responsible for
profit and investments made for profit (income and cost for income (and for selling costs only
in order to earn the profit. controllable) related expenses only)
Measures such as ROI, RI and
EVA are applicable IF no control over internal
transfers (thus
Management responsible for management cant control
capital investment decisions transfer price) thus NOT
Has control over costs profit centre
Performance should be Income – costs
measured based on income,
cost, investment and debt
under the management
control
What is the manager evaluated on?
Mangers should be evaluated COST SAVINGS
on costs & income within their - This is an effective
control (and investments and evaluation of the
debt if it is under their control) managers
performance as this is
CANNOT use the pure profit CANNOT: what the manager has
before tax figure as there are ➔ GROSS PROFIT control over
certain uncontrollable costs Can evaluate on CANNOT
and apportioned costs which Gross profit as the ➔ Measure them based on
need to first be removed from manager is only profit as they do NOT
the profit before tax figure responsible for have control over the
sales and sales internal transfer price as it
CANNOT use Net profit before expenses and thus is enforced by the
tax has NO control company
over the other ➔ Therefore NOT
expense which appropriate to evaluate
make up gross based on increase in NET
profit PROFIT
➔ Also if the division cannot
sell externally without
special permission it is
Inappropriate to value
based on increase in net
profit
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