sneha mcs ppt
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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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