Page 68 - DMGT514_MANAGEMENT_CONTROL_SYSTEMS

Unit 4: Responsibility Centers

should be designed to measure management performance routinely with economic performance Notes
being derived from these performance reports, as well as from other sources.
Profit centre evaluation is based on income statement format. The conventional income statement
can be recast to highlight the various sub-categories. The sub-categories are done based on
criteria of variability, controllability and attributability. According to the variability attribute,
costs that are neither directly controllable by a particular segment nor attributable to it, are
excluded from the measurement of divisional performance e.g., administrative salaries, property,
taxes, etc. The controllability concept implies that the performance attributes should be
controllable by the divisions/responsibility centers. The attributability concept refers to the
outcomes/performance characteristics that are directly associated with or directly traceable to,
the existence and operation of a segment. The main sub-categories in a typical segmented
income statement are:
1. Sales and other major revenues: Sales made to outside customers are usually, easy to
identify and measure. There may be difficulty in measuring products/services sold by
one division because of problems associated with transfer pricing.
To evaluate a segment’s sales revenue, they must be compared with other performance
measures such as: (i) prior period sales of the same segment, (ii) sales volume of a
comparable department of the same firm, (iii) sales of other companies in the same industry
and (iv) the divisions budgeted sales volume. These comparisons may be made in terms of
rupees value, physical volume, and rate of changes or variances from the budgeted amount.

2. Controllable variable costs: Cost in this group means directly controllable by the divisional
managers and vary according to the activity levels, namely: divisions variable cost of
goods sold and variable administrative and marketing costs. These costs should be
evaluated using variance analysis, trend analysis and variable cost to sales ratio,
comparison with the segments of the same firm and with the similar segments of other
companies in the same industry.
3. Controllable contribution margin: Sales revenue minus controllable variable costs equals
the division’s controllable contribution margin. It can be used to evaluate the ability of a
division to sustain itself, to make a contribution to the fixed costs of divisions, common
costs of the firm and profits of the organization. The evaluation should be based on
variance analysis.

4. Controllable fixed costs: The controllable fixed costs are those fixed costs of a period
directly and exclusively related to the decision of the management of a division.

Example: Divisional rent charges for equipment and property and executive’s salaries
etc.; such costs should be compared with budgeted fixed costs to evaluate performance.

5. Controllable segment margin: This is the excess of controllable contribution margin over
controllable fixed costs. This should be compared with the previous period’s results and
predetermined budgeted amounts.
6. Attributable segment costs: These are costs that are not controllable by a divisional manager
and which could have been avoided, had the divisions been withdrawn.

Example: Division manager’s salary, depreciation, rent, insurance on facilities used
exclusively by the division but acquired as a result of decision made at higher management
levels.

Similarly, interest charges on debt that was incurred to support the operation of the
division but was decided outside the division. These costs are not directly controllable by

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