If non-traceable costs are apportioned to the different offices, the New York Office will be regarded as the most efficient and effective by holding the highest profitability level. It would be followed by Chicago, Little Rock and finally Paris. As regards to the latter office, a net loss of $1,000 is reported. This implies that the Paris Section is not trading profitably and is thus deteriorating the financial health of Creative Consumer Consultants Limited.
By utilizing the profit statement prepared above, in which only the traceable expenditure is allotted, different conclusions are derived. The New York Division is still ranked as the best following by the Chicago Section. However, the Paris Office, under such profit statement, is attaining a substantially higher profitability level than the Little Rock Section. Indeed the profits of the Paris Department exceed those of the Little Rock Office by $2,000 ($3,000 – $1,000).
The comparison performed in this section outline the need of accurate financial reporting in the decision making process. As we can see from this case if non-traceable costs are allocated, the office manager of the Paris Division would be penalized on grounds of ineffectiveness. However, this manager was capable to control the costs that fall under his responsibility as outlined by the revised profit statement. Therefore his effectiveness during the performance evaluation exercise cannot be diminished from expenditure that fall outside his control.
The Essay on Profit Center
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Method that enhances Goal Congruence
goal congruence is a management accounting term that encompasses the ability of top management to enhance the employees as well as the operational managers of the organization in reaching the corporate objectives of the firm. Different school of thoughts have evolved during the years concerning goal congruence, some of which highlighting the behavioral and motivational factors leading to such goal congruence for the company.
The best method that stimulates goal congruence for Creative Consumer Consultants Limited is the revised profit statement, under which non-traceable costs are not allotted during performance reviews. As outlined in the previous section, if the original method was utilized, the office manager of the Paris Division would have been penalized on grounds of ineffectiveness. However, we noted that such expenditure was outside his control.
