Análisis del sistema de caja común en el Ecuador

A Profit Centre is a segment of a business, often described division that is responsible for both revenue and expenses. In a non-profit organization, the condition `revenue centre' may be used instead of profit centre' as profit may not be the primary objective-of such an organization. In other words, a profit centre is a responsibility centre in which inputs are measured in conditions of expenses and outputs are measured in conditions of revenues.

The expense centre, expense responsibility centre and profit centre are inter-related. The main objective of expense centre is to effect expense control. In case of profit centre, expense control is only one of the many thoughts. The scope of a profit centre is broader than that of expense centre. In a profit centre the events of performance is boarder than that of an expense centre as in expense centre, we measure only one unit, i.e., cost whereas in profit centre we measure both cost as well as revenue. Likewise, the scope of behaviors of profit centre is much broader than that of revenue centre because of the responsibility to produce the product more efficiently.

In a profit centre, manager has the responsibility air' power to create decisions that affect both costs and revenues for the department or division. In information, the main objective of a profit centre is to earn profit. Therefore, a profit centre manager aims at both the manufacture and marketing of a product. Such a manager decides in relation to the manufacture policies, the price, and marketing strategies. He is concerned with raising the centre's revenues through rising manufacture and/or improving sharing methods. Though, such a manager does not take decision nor has control in excess of the investment in the centre's assets. He may create proposals for the investment in the

division but the decisions in relation to it are normally taken through the top management. A typical instance of a profit centre is a division of the company that produces and undertakes marketing of dissimilar products. Therefore, it is concerned both with formation of manufacture strategy as well as marketing strategy.

Financial performance of a profit centre manager is measured in conditions of attainment of budgeted profits that way, a comparison has to be done flanked by the profit centre and budgeted profit. Though, a problem arises in measuring its performance in conditions of profits, when products and services are provided to another element within the organization. Determination of profit is easier when products and services are sold outside the organizations. For instance, repairs and maintenance department in a company can be treated as a profit centre if it is allowed to bill other manufacture departments for the services provided to them,

The Role of Profit Centers in an Organization

In mainly of the organizations, it is establish that there is more concentration on profit centre as a significant element for the purpose of control. In case of profit centre, it is possible to have an effective system of evaluation of performance which is quite necessary to impose effective control. Such effective control, from this point, is not possible neither in case of expense centre nor revenue centre. The profit centre focuses its attention on the mainly crucial unit of an organization, i.e., profit. The profit is a combined measure of both effectiveness and efficiency. It gives a powerful tool for measuring how well the profit centre and its manager have performed.

It motivates the profit centre manager to take decision in relation to the inputs and outputs in such a way that the profit of a profit centre is maximized. The profit centre becomes a good training ground for common management responsibility. It enables the top management to focus its attention and provide advice to those segments which require them the moss. It also provides a sense of satisfaction to the manager concerned as the result is directly connected to the behaviors. The profit centre used as a means of basing the compensation structure. The profit centre is also closely related to the organizational principle of decentralization.

Advantages of Profit Centers

The operating decisions can be taken quickly without referring to the headquarters.

Excellence of the decisions is improved because the managers taking these decisions are aware of the ground realities and also closest to the point of decision.

Higher management can focus on macro issues leaving the micro issues to be tackled through operational managers.

Profit consciousness is enhanced in profit centre managers due to the information that profit is going to be the criteria for assessment and as a result the managers would be sensitive to the impact of their action on both the expenses and revenue.

Managers are free of micro restraints and can use their creativity and initiative.

Profit centers are incubators for future business managers at higher stage as they are excellent training ground for common management.

Profit centers make a reservoir of managerial talent which a company can use throughout diversification.

Use of profit centers helps the company to locate and diagnose the problem regions quite easily, because profit centers give information on the Profitability of the components of the company.

Difficulties with Profit Centers

Top management may loose some control as the control reports prepared through the profit centers are not as effective as personal knowledge of an operation.

Managers may be lacking competence in common management operations.

There may be unhealthy competition in the middle of the several profit centers, which may manifest itself in form of undesirable behaviour of managers. This kind of undesirable behaviour may contain, hiding of information, hoarding of equipment etc.

There may be disagreement in the middle of dissimilar profit centers concerning transfer, price, sharing of general cost, sharing of revenues generated through joint efforts.

Profit centre managers may lay emphasis on short condition profits at the expense of extensive condition profits through neglecting crucial region like manpower training and development, maintenance and research and development behaviors.

High profits of the profit centre may not always optimize the profits of the company.

Setting up of profit centers may entail extra cost to the company in the form of additional management, staff and record keeping and additional ancillary infrastructure which may lead to redundant tasks at each profit centre.

Boundary Circumstances for Profit Centers

In companies where each of the principal function of manufacturing and marketing is performed through separate organizational elements, these kinds of companies (organizations) are recognized as functional organizations. As the companies expand and mature in excess of an era of time offering diverse products and services, it becomes hard for top management to pay equal attention to all

products and services. In this scenario one of the options accessible is to divisionally the company which implies that each major organizational element in the company is responsible for both the manufacturing and the marketing of the product, implication of this move is that there is greater amount of delegation of power and responsibility to the operating managers. An organization with many divisions is an intricate as a whole. Tile divisions, though, are not separate entities in their own right. The design of profit centers in organizations will have to contend with the question of service functions centrally situated in headquarter which do not directly contribute towards performance of profit centers. We also have to consider the domain of the profit centre. Therefore, defining the boundary circumstances for the profit centers is a significant aspect of the design of profit centers. The major problem associated with the service functions is that there are no direct events of profit which can satisfactorily evaluate the performance of the function. Even though the service functions are very significant in the profit performance of the company as a whole, it is very hard to isolate and measure their contribution. It may be possible to organize several service centers into profit centers and their services could be sold, but in mainly organizations they are planned to give their services only to the organization. Their services may not be used in sufficiently big volume if they are organized as profit centers. The examples of service functions are management information service, legal services, corporate scheduling department etc. A plausible solution is to distribute the cost of service functions in the middle of several profit centers where such action can be economically justified.

The major problem is to describe the boundary circumstances for the profit centre where through we can balance the costs and revenues of the division. The major objective of the exercise is to ensure that we maximize sure revenues and minimize sure costs. So, measurement of profits as the outcome becomes the major criteria in decision creation within the division. This leads us to the mainly logical choice of accepting profit performance measurement as the major factor guiding the determination of profit boundaries. Though, we should not lose sight of the information that what is good performance of the division require not always be the good performance of the company as a whole. Further, the profit centers should not result in disagreement with other divisions within the organization. Appropriate boundaries for profit centers therefore would ensure a more meaningful profit performance of the profit centre managers and act as better incentive.

Economic foundation of the profit centre boundary revolves approximately factors such as market for the product, cost and revenues structure and the reparability of their cost and revenues from the rest of the organization, management objectives, and all the extent of operational freedom that is accessible. Access to the market is very significant with respect to profit centre performance in that the choice of market, version of the product to market are necessary for maximization of revenues.

Cost and revenues are separate from the rest of the organization and the skill to power them through the decisions of the division is a necessary condition for influencing profit. A manager should be evaluated only on the foundation of things in excess of which he has control. If mainly costs and revenues are not separable and controllable part of this is too little, profit centre may not be of much use. Management necessity is willing to accept the profit performance of the division and be prepared to guide the decisions of the profit centers without curtailing their freedom. It should be borne in mind that profit alone could never be the sole criteria for evaluation of the performance of a profit centre.

All characteristics measured, though; rightly demarcated boundaries of profit centers will not produce any tangible to the organizational unless the divisions have a reasonable measure of operational autonomy. The autonomy will have to be clearly understood within the context of overall rules of the game recognized through the top management. Autonomy is crucial in decision regions such as buying, manufacture and it‘s scheduling; inventory policies, choice of market, product mix, and pricing

Performance Measurement of Profit Centers

Having demarcated the boundaries for profit centers; it becomes significant and necessary to measure their performance. Though, with boundaries so set, performance measurement becomes easier and convenient. But still the measurement of profit is not an easy task. It poses problem as the concept of profit may not be very clear, the problem of transfer pricing has to be tackled and the decision has to be taken concerning compensation based on evaluation.

Vital of Measurement of Performance

It is not quite easy or easy to decide the foundation of measurement of performance. Though, the profit contribution through the profit centre may be taken as foundation for it. Though, if current profit is taken as the foundation it may be in tune with goals of the organization which may be short- condition as well as extensive-condition. In information, the short condition profit goals may be in consonance with the extensive-condition profit goals. In this connection, one problem arises concerning question of current profitability as compared to future growth. If we confine to current profit only, it would be at the cost of future growth.' Likewise, the concern for future growth can be achieved at the expense of the current profit performance.

Another problem may arise when we devote our attention to R&D. Any additional cost incurrent for R&D would certainty affects the current profit performance. Likewise, the cost for current training

and development which is quite necessary for the development of the organization ultimately has the adverse impact on current profit performance.

The Concept of Profit

There are dissimilar concepts used related to profit, hence, that would also pose a problem in this connection. This condition may have dissimilar connotations, such as book profit, real profit, and profit contribution. The easiest and mainly acceptable concept of profit is the book profit, which is shown through the books of explanation. Though, when we take into explanation the book profit, the problem of allocation of organizational expenses arises. It is not easy to solve it as no method of such allocation appears to be scientific one and that may be questionable.

The real profit may be a better foundation of evaluation of performance, as the real profit takes into explanation economic value of the possessions consumed. For this, valuation of possessio ns consumed should be taken, taking into explanation depreciation. In this case, also the question of allocation of general expenses remnants untracked. This leads to choosing the third concept of profit, i.e., the profit contribution. It implies profit contributed directly through the division. It may also be described as `incremental profit' or the `additional profit' earned solely as a result of operations of the division.

The Question of Expression of Profit

Another related problem is how we express the profit in the context of profit centers. Is it to be expressed as an absolute amount? Whichever way express profit, it has its own significance. And all the questions relating to measurement of profit will be applicable in whatever way we express profit. .

Transfer Price and Profit Centers

The measurement of profit in a profit centre is also complicated through the problem of transfer prices. A transfer price is a price used to measure the value of goods/ services furnished through a profit centre to other responsibility centers within a company. In other words, when internal swap of goods and services takes lay flanked by the dissimilar divisions of the firm that requires their valuation in conditions of money. It becomes quite necessary to deal with transfer price as the profit centers as buyers and sellers should be able to negotiate prices of such transfer independently.

Problem of Analysis of Profit Centre Results

Separately from the profit measurement and associated troubles, there is also the problem of understanding the performance itself. Usually profit centre performance will have to be evaluated against some standards and the mainly general practice is to evaluate the similar against the budgets. The variances happen as a result of the combined power of a host of factors. Unless these powers can be segregated and understood the major objective of control would not be achieved. Further, reliance on the total deviation without isolating the controllable and non-controllable characteristics of the variations may have demotivating impact on the managers. The problem will also be dissimilar when the division is a single product or a multi product division. Though, in the case of a multi-product division the problem may be more intricate.

We shall attempt to examine the variances of net income before tax for profit centre. We use the data of Ibid Apparel presented in Table 3.1 and 3.2 for this purpose. For the sake of simplicity, we have grouped the products into major clusters and as suggested, use the average data for each group as the per element information.

Table 3.1 Ibis Apparels Master Budget Sales and Expense Data for Period 1 (in 000)

On comparing the budget and actual presented in Table 3.1 & 3.2 we discover that the profit before tax is down through Rs. 5,000 from the budgeted figure. Let us disaggregate the information and see the actual powers so as to understand the performance of the profit center. As a first step towards this we attempt to construct the flexible budget for the division. Table 3.3 presents the flexible budget calculations.

Sales Volume and Mix Variances

From Table 3.4 it is easy to understand the actual performance and see how the decline in profit after tax of Rs. 5,000 has resulted. We can see that the total sales volume of 15,000 has not change and hence no loss is attributable to volume variance. Though, the sales mix does change and the drop in sales of high contribution outer garments results in a combined loss of Rs. 39,000, despite a rising in sales of low contribution undergarments. That is, the company has lost a contribution of Rs. 51,000 on outer garments and gained a contribution of Rs. 12,000 on undergarments, therefore incurring a loss of Rs. 39,000 on explanation of sale mix change.

Price and Expense Variances

The Rs. 40,000 favorable price variance in Table 3.4 arises from the information that the average actual sales price exceeded the average flexible budget sales price. This can be disaggregated through products as follows:

Now we have a clear thought as to which segments of the business have contributed towards gains and which segments contributed towards losses. This information will help the profit center management and the top management to tackle the situation better.

Profit Center as Motivational Tool

The behaviour of the divisional managers is often heavily power through how their performance is measured. Therefore, profit centers act as a tool for motivating such managers. Though, it is quite debatable as to what extent, profit centers motivate them. Sometimes, it may demotivate them. The dissimilar arguments supporting the value of profit centre as... motivational tool can be summarized as follows:

A profit centre manager is perceived to have a higher status in the organization and hence gives a psychological benefit to the division manager. It is argued that this perceived importance motivates him to perform better. Through creation the managers responsible for the profit performance of their divisions it tried to blend their objectives with the profit objectives of the company.

Profit centers tend to enhance the profit consciousness of the managers and subordinates within the division and hence they all strive for maximizing the profits of the division. This