CAN YOU PASS THE PROFIT TEST

CAN YOU PASS THE PROFIT TEST VIEWPOINT VIRTUALL Y every industrialist would those covered in the survey charged out basis used for apportioning costs, impugn that politically engendered all central costs. thus achieving greater accuracy attitude of mind which condemns profit The surprising omission in the main and, of course, a fuller acceptability as a dirty word rather than welcomes it reasons given for absorbing central costs on the part of those who have to as a measure of a job well done and a accept the charges. was the need to control management need well met. Yet there are many service costs at the centre and within the 5. When including charges on operat­ managers with responsibility for central units. ing statements, care should be services who resent being judged by that There is a danger that the adminis­ taken to show central costs same meter — profitability as the key separately from other costs and, trative machine may grow until its costs indicator of effective performance. are far too high for the service it is giving. where appropriate, to distinguish Possibly there is an implied recognition between those costs which are The argument generally goes that that costs are to be controlled by 'controllable' by the unit and those although group management (often showing unit managers the true cost of which are not. synonymous with head office or parent operating units. However, for really company) and the services they provide 6. The notion that each unit must effective control to take place there play its part in contributing to the to operating units incur substantial ex- would be a need to consider the service overall results of the company ­­­­­­­­­, they do not produce any required to achieve the desired level of tangible income and so must inevitably should be encouraged. This follows efficiency, and to ascertain whether the escape the profitability acid test. the management-by-objectives approach, which is also the basis But clearly such costs have to be of responsibility accounting, but recovered from somewhere within the The cold light of with the latter more emphasis is organisation. Why cannot the services be given to the financial targets. costed and charged to the divisions which efficiency must shine utilise them? What is there to prevent 7. The units should be involved in on headquarters, too even an administrative unit being run as establishing what is a reasonable a profit centre? How should overheads level of management service and be controlled? On what basis can such methods used were the most economical related costs, and thereby avoid costs be allocated, apportioned or ab­ and effective. empire-building at head office. sorbed equitably and yet simply? What This requires an attitude of mind 8. The charges made to units should which recognises the need for a positive effect does "charging out" have on the be kept reasonably low and ex­ approach. operating units' performance? pressed as a percentage, so that the The fact that the majority of profit central services are not regarded These questions have just been ex­ centres have to accept the charges made as a constant drain on the profits plored in a survey conducted by the without any right of appeal seems par­ made. British Institute of Management. The ticularly harsh. If "responsibility 9. Special attention should be paid survey, "Profit-centre Accounting" by accounting" in its fullest sense is to to building up an adequate J. E. Melrose-Woodman (B.I.M., £10) operate, there must be recognition that communications network to inform covered 273 UK-based group companies. authority and responsibility should be units of changes made in services The majority, 220, absorbed central linked as equal partners. and the costs incurred. costs by charging them out to operating Creating the atmosphere conducive 10. Unit managers should be given an units. However, this policy does not provide a simple solution and in turn to acceptance of profit-centre accounting opportunity to express their views raises further problems. For instance, is the most difficult problem facing on any charges made, so that those who have to introduce, implement how can central costs be spread equitably misunderstandings can be avoided. and run a system. over a number of operating units in such The B.I.M. report concludes: "Even In particular, the research findings a way as to bear some relationship to when profit-centre accounting is not their responsibility for incurring the suggest the following implications for practised, many of these observations costs, and their ability to control them? management action: will apply. However, since in that case a 1. The reasons for creating profit negative attitude is being adopted of not The survey examined both the overall centres should be made clear. attempting to charge costs, there should policies of companies and methods of implementation to discover how com­ 2. Profit and cost-consciousness not be the same need for justification of the action taken (or lack of it!)". panies solved such problems. It also should be a normal part of the examined the reasons behind policies management philosophy. But that is not the point. The and the attitudes of both central and 3. Resentment on the part of unit market place will take care of the effectiveness or otherwise of the operat­ unit managements towards them in an managers should be avoided by attempt to evaluate the various solutions. educating them in the use of the ing units. The cold light of efficiency The findings were heartening. They system, the meaning of the must shine on headquarters' performance showed quite conclusively that profit- variances, and the need to take too. And no light is more revealing, more centre accounting in a full or diluted corrective action. searching and more necessary — in the national interest as well as the corporate form was accepted by a large number of 4. Much more attention should be companies. Moreover, a majority of paid to the selection and use of the one — than that of profitability. ■ INDUSTRIAL MANAGEMENT http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Industrial Management Emerald Publishing

CAN YOU PASS THE PROFIT TEST

Industrial Management, Volume 75 (3): 1 – Mar 1, 1975

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Publisher
Emerald Publishing
Copyright
Copyright © Emerald Group Publishing Limited
ISSN
0007-6929
DOI
10.1108/eb056492
Publisher site
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Abstract

VIEWPOINT VIRTUALL Y every industrialist would those covered in the survey charged out basis used for apportioning costs, impugn that politically engendered all central costs. thus achieving greater accuracy attitude of mind which condemns profit The surprising omission in the main and, of course, a fuller acceptability as a dirty word rather than welcomes it reasons given for absorbing central costs on the part of those who have to as a measure of a job well done and a accept the charges. was the need to control management need well met. Yet there are many service costs at the centre and within the 5. When including charges on operat­ managers with responsibility for central units. ing statements, care should be services who resent being judged by that There is a danger that the adminis­ taken to show central costs same meter — profitability as the key separately from other costs and, trative machine may grow until its costs indicator of effective performance. are far too high for the service it is giving. where appropriate, to distinguish Possibly there is an implied recognition between those costs which are The argument generally goes that that costs are to be controlled by 'controllable' by the unit and those although group management (often showing unit managers the true cost of which are not. synonymous with head office or parent operating units. However, for really company) and the services they provide 6. The notion that each unit must effective control to take place there play its part in contributing to the to operating units incur substantial ex- would be a need to consider the service overall results of the company ­­­­­­­­­, they do not produce any required to achieve the desired level of tangible income and so must inevitably should be encouraged. This follows efficiency, and to ascertain whether the escape the profitability acid test. the management-by-objectives approach, which is also the basis But clearly such costs have to be of responsibility accounting, but recovered from somewhere within the The cold light of with the latter more emphasis is organisation. Why cannot the services be given to the financial targets. costed and charged to the divisions which efficiency must shine utilise them? What is there to prevent 7. The units should be involved in on headquarters, too even an administrative unit being run as establishing what is a reasonable a profit centre? How should overheads level of management service and be controlled? On what basis can such methods used were the most economical related costs, and thereby avoid costs be allocated, apportioned or ab­ and effective. empire-building at head office. sorbed equitably and yet simply? What This requires an attitude of mind 8. The charges made to units should which recognises the need for a positive effect does "charging out" have on the be kept reasonably low and ex­ approach. operating units' performance? pressed as a percentage, so that the The fact that the majority of profit central services are not regarded These questions have just been ex­ centres have to accept the charges made as a constant drain on the profits plored in a survey conducted by the without any right of appeal seems par­ made. British Institute of Management. The ticularly harsh. If "responsibility 9. Special attention should be paid survey, "Profit-centre Accounting" by accounting" in its fullest sense is to to building up an adequate J. E. Melrose-Woodman (B.I.M., £10) operate, there must be recognition that communications network to inform covered 273 UK-based group companies. authority and responsibility should be units of changes made in services The majority, 220, absorbed central linked as equal partners. and the costs incurred. costs by charging them out to operating Creating the atmosphere conducive 10. Unit managers should be given an units. However, this policy does not provide a simple solution and in turn to acceptance of profit-centre accounting opportunity to express their views raises further problems. For instance, is the most difficult problem facing on any charges made, so that those who have to introduce, implement how can central costs be spread equitably misunderstandings can be avoided. and run a system. over a number of operating units in such The B.I.M. report concludes: "Even In particular, the research findings a way as to bear some relationship to when profit-centre accounting is not their responsibility for incurring the suggest the following implications for practised, many of these observations costs, and their ability to control them? management action: will apply. However, since in that case a 1. The reasons for creating profit negative attitude is being adopted of not The survey examined both the overall centres should be made clear. attempting to charge costs, there should policies of companies and methods of implementation to discover how com­ 2. Profit and cost-consciousness not be the same need for justification of the action taken (or lack of it!)". panies solved such problems. It also should be a normal part of the examined the reasons behind policies management philosophy. But that is not the point. The and the attitudes of both central and 3. Resentment on the part of unit market place will take care of the effectiveness or otherwise of the operat­ unit managements towards them in an managers should be avoided by attempt to evaluate the various solutions. educating them in the use of the ing units. The cold light of efficiency The findings were heartening. They system, the meaning of the must shine on headquarters' performance showed quite conclusively that profit- variances, and the need to take too. And no light is more revealing, more centre accounting in a full or diluted corrective action. searching and more necessary — in the national interest as well as the corporate form was accepted by a large number of 4. Much more attention should be companies. Moreover, a majority of paid to the selection and use of the one — than that of profitability. ■ INDUSTRIAL MANAGEMENT

Journal

Industrial ManagementEmerald Publishing

Published: Mar 1, 1975

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