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headed by a manager who is responsible for its activities. In a sense, a company is a collection of responsibility centers ,each of which is represented by a box on the organization chart. A Responsibility center should be separable and identifiable for operating purposes.
objectives. Created to help implement various organizati-nal strategies. Represents sub unit of an organization.
Revenue Center
Profit Center
Investment Center
outputs to inputs or the amount of output per unit of input. Efficiency is a relative term. Effectiveness :- Effectiveness is determined by the relationship between a responsibility centers output and its objectives. i.e the more this output contributes to the objectives ,the more effective the unit.
Expense center
Expense centers are responsibility centers
whose inputs are measured in monetary terms ,but whose outputs are not. There are two general types of expense centers: (a) Engineered Expense Center (b) Discretionary Expense Center
proper amount can be estimated with reasonable reliability- for e.g , a factory cost for direct labor, direct materials, components ,etc. Their input can be measured in monetary terms. Their output can be measured in physical terms. These centers are usually found in manufacturing operations The optimum dollar amount of input required to produce one unit of output can be determined.
Investment Center
This responsibility center goes a step further than a
profit center. The success of this center is not measured not only by its income but also by relating that income to its invested capital. The managers of this center are responsible for both sales revenues and costs and ,in addition ,have responsibility and authority to make capital investment decision.
Measurement of Performance
As a responsibility center , the performance of a
unit would be measured in relation to the revenues or profits and the assets employed in a division. Measurement of investment center performance can be viewed as the evaluation of an aggregation of past and present capital projects as opposed to the evaluation of each project individually.
(EVA)
evaluation of an investment center. This measures takes into consideration two elements: 1. Net Income Before Taxes. 2. Invested Assets (Assets employed)
Advantages of ROI
1. 2.
3. 4.
5.
Generally accepted measure of overall performance. This is a ratio or percentage ,because of this serves as a better basis for comparing the performance of different division. This measures encourages goal congruence between the division and the firm. ROI also shows whether the companys borrowing policy was wise economically and whether the capital had been employed fruitfully. The business can survive only if ROI is more than coat of capital employed in the business.
Defects of ROI
1.
2.
3. 4. 5. 6. 7.
Manipulation possible. Different basis for computation of profit and investments. Emphasis on short term profits. Poor measure. Undue significance to capital resources. Limits initiative. Change factor.
charging for the cost of capital provided by the lenders and shareholders. RI (EVA) = Actual income desired income
Merits of EVA
Encourages capital investment.
DEMERITS OF EVA
It is an absolute measure.
rate(cost of capital)