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Hi, I have a question about controllable profit. As it is said from textbook, the controllable profit minus non-controllable fixed cost is divisional profit. So the controllable profit contains non-controllable element. Thus I think it cannot be controlled by manager(staff). Why it is a better measurement than divisional profit?
No, controllable profit is controllable revenue less controllable costs. [Conrollable = divisional manager can influence].
Controllable profit – non-controllable costs [presumable all fixed as variable would be controllable] = divisional profit.
Controllable profit measures managerial performance
Divisional profit measures divisional performance.But then, in terms of controllable profit, kindly explain the difference between net and controllable profit. And why is it taken after depreciation but before tax.
Net profit = profit after all expenses.
However, not not all expenses are controllable (eg if determined by head office) so controllable profit can be different.
If the divisional manager is responsible for buying non=-current assets, then the manager is responsible for the depreciation that comes with them.
Tax is the responsibility of the government.
Your explanation is very clear, thank you. But this question from the examiners report has thrown me off a little:
Comments about Section A
The following questions are taken from Section A of the exam.
Example 1
Division A reported sales of $400,000 and a contribution of $160,000 for the most recent period.
Fixed costs for the period were $80,000, of which 20% were controllable by the division’s manager.
What is the amount of profit which is controllable by the division’s manager for the most
recent period?
Controllable profit is calculated by deducting controllable expenses from controllable revenues.
Revenues and variable costs are usually controllable by the divisional manager. The controllability
of fixed costs depends upon the responsibilities given to the divisional manager. In this case we
are told that only 20% of the fixed costs (20% x $80,000 = $16,000) are controllable by the
divisional manager.
Controllable profit is therefore $160,000 – $16,000 = $144,000To me, controllable contribution is $144,000.
What am I missing?
Profit = Contribution – Fixed costs.
So, if you subtract controllable fixed costs from contribution you will get controllable profit.
I agree with you, controllable profit is $144,000 and where did you find it? What examiner’s report? Is there any answer?
I have no idea where this query arose from. The poster gave no references.
Hi, can you tell me what is controllable income? Controllable Profit is Controllable Income – Controllable expenses. I get the expenses part that it is unfair to deduct the expenses beyond manager’s control from the profit. But what would be considered as controllable profit? And does it have anything to do with deducting investment income?
The best guidance is to ask what the manager can control.
If surplus funds are send from divisions to head office for investment by the treasury department then any interest would not be controllable by the manager. If, however, divisional managers can invest surplus funds (unlikely because of cash control issues and because larger deposits get better interest rates) then the manager is responsible for investment income and it would rank as controllable.
Hey there, I would like to find out. if a division buys an asset and the division’s management team arranges 70% long-term financing for the purchase price and the 30% is paid from cash resources. Will I be correct in taking the 70% to controllable liabilities, 30% to controllable assets and subtract the 30% in calculating my controllable profit? Thanks
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