Evaluating Profit and Revenue Centers

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Questions and Answers

What is the primary focus of performance evaluation for profit centers?

Control of revenues and costs (correct)

Management of fixed costs only

Decision on investment strategies

Determination of variable costs

How is profit variance classified when actual profits exceed budgeted profits?

Unfavorable

Inconclusive

Favorable (correct)

Neutral

Which of the following is included in the evaluation of revenue centers?

Analyzing selling discounts and selling prices (correct)

Deciding on investment amounts

Managing fixed costs

Controlling all operational expenses

What formula represents Contribution Margin?

Revenues - Variable Costs (C) Signup and view all the answers

What variance is calculated by looking at the difference between actual selling price and budgeted selling price?

Selling price variance (B) Signup and view all the answers

Which aspect do cost centers primarily evaluate?

Cost management (D) Signup and view all the answers

What is the recommended method for evaluating the Contribution Margin Variance in a revenue center?

Assess both selling price and sales volume against budgeted amounts (D) Signup and view all the answers

What kind of budget do revenue centers operate under?

Strict cost budgets (A) Signup and view all the answers

What indicates a favorable sales volume variance?

Actual sales volume is greater than budgeted sales volume. (C) Signup and view all the answers

Which formula represents the Total Cost Variance for an Engineered Cost Center?

Actual Costs - Flexible Budget for Actual Output Produced (B) Signup and view all the answers

How is Profit Variance calculated?

Contribution Margin Variance + Total Cost Variance (A) Signup and view all the answers

What type of centers rely on non-financial measures for evaluation?

Discretionary Cost Centers (D) Signup and view all the answers

If Actual Costs exceed Flexible Budget for Actual Output Produced, what is the result?

Unfavorable Total Cost Variance (C) Signup and view all the answers

Which of the following is true regarding Investment Centers?

They can create profits by simply increasing investments. (B) Signup and view all the answers

What should be included in the Flexible Budget for Actual Output Produced in an Engineered Cost Center?

Budgeted Variable Cost per unit * Actual Output + Budgeted Fixed Costs (A) Signup and view all the answers

Which performance measure is commonly used to evaluate Engineered Cost Centers?

Total Cost Variance (C) Signup and view all the answers

Study Notes

Profit Center Evaluation

Profit centers can adjust the production mix, sales mix, and selling prices.
They do not control the level of investment.
They control both revenues and costs.

Revenue Center Evaluation

Revenue centers can decide who to sell, selling discounts, and sometimes selling prices.
They have a limited cost budget for travel and promotion.
They control revenues and a metric called contribution margin.
Contribution Margin = Revenues – Variable Costs.
Contribution Margin per unit = Selling Price – Variable Costs per unit.

Performance Measures

Profit Variance: Actual Profits vs Budgeted Profits
Contribution Margin Variance: Measures the deviation in contribution margin from budgeted amount.
Selling Price Variance: Deviation in contribution margin due to difference in selling price (budget vs actual).
Sales Volume Variance: Deviation in contribution margin due to difference in sales volume (budget vs actual).

Cost Center Evaluation

Managed as engineered cost centers or discretionary cost centers.
Engineered cost centers have a clear relationship between inputs and outputs, e.g., a factory.
Discretionary cost centers lack a clear relationship between inputs and outputs, e.g., legal, R&D, HR, and Accounting.

Performance Measures

Total Cost Variance: Actual Costs vs Flexible Budget for Actual Output Produced.
Performance of discretionary cost centers measured by non-financial factors.

Investment Center Evaluation

Investment centers control both revenues and expenses, and also make investment decisions.
Investments are evaluated based on profits generated in relation to the amount invested.

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Description

This quiz focuses on the evaluation of profit and revenue centers in business. It covers aspects such as production and sales mix adjustments, cost controls, and key performance metrics like profit variance and contribution margin. Test your knowledge on these vital business concepts!