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Q1) IF we are given the full financial statement to calculate ROI then what profit should we consider?
Q2) Should we need to deduct all the costs controlled by head office from that profit figures?
Q3) Technical article speaks of controllable profit – Please explain what it is?
Q4) Are there any specific costs that need to be deduct to get controllable profit for a division?
1.The final profit of the division is measuring the performance of the division, or the controllable profit is measuring the performance of the manager.
2. The final profit will already have the costs controlled by head office deducted!!! If using controllable profit then the head office costs need adding back to the final profit.
3. My lectures on this and the technical article both explicitly define the controllable profit!! It is the profit that is under the control of the divisional manager.
4. All controllable costs are deducted – i.e. all costs other than those determined by the head office.
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Relating to your previous answer.
(1) When we are measuring the performance of a division – should we use profit before interest & tax (OR) net profit as you may call it final profit?
(2) If I do get this right – then you are saying that final profit (which i have no idea what profit is that) is used to measure the performance of the division where we will deduct all the costs controlled by head office. So we will left with costs under the control of the division.
(3) Controllable Profit is used to measure the performance of the manager (ie not the division) where we will not deduct the costs controlled by head office. So we will have the costs of division as well as the head office.
(4) We cannot say for sure whether the final profit or controllable profit is either Gross Profit / PBIT or Net Profit. (true?)
1. Divisions do not pay interest or tax. They are not separate companies and it is the company as a whole that pays them.
2. The final profit is the net profit as learned in Paper FA (was F3) and is after charging all expenses including expenses determined by head office. If measuring the manager’s performance we only charge expenses controlled by the manager and so add back the head office expenses to the original net profit.
3. The costs appearing in the divisions SOPL are those controlled by the divisional manager and those controlled by the head office. If measuring the managers performance we charge only those costs controlled by the divisional manager.
4. Not true. What you have written makes no sense.
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