BU247 Chapter Notes - Chapter 11: Accounts Receivable, Transfer Pricing, Profit Center
Document Summary
Using the controllability principle to evaluate responsibility centres. The controllability principle states that the manager of a responsibility centre should be assigned responsibly only for the revenues, costs, or investments responsibility centre personnel control. Revenues, costs, and investments that people outside the responsibility centre control should be excluded from the assessment of the centre"s performance. A significant problem in applying the controllability principle is that in most organizations many revenues and costs are jointly earned or incurred. The activities that create the final product in this company are sequential and highly interdependent. Processing should be evaluated as a cost centre. The choice of the performance measure should influence decision-making behaviour. The profit measure is so comprehensive and pervasive that organizations prefer to treat many of their organization units as profit centres. The segment margin report divides the organization into responsibility centres. Organizations use different approaches to evaluate whether the segment margin numbers are good or bad:
