For what purpose is controllable margin most useful?
a. Preparing the master budget
b. Performance evaluation of profit centers
c. Break-even analysis
d. Evaluating cost centers
The correct answer and explanation is :
Correct Answer: b. Performance evaluation of profit centers
Explanation:
Controllable margin is most useful for performance evaluation of profit centers because it provides a measure of the profit that a manager can directly influence. It focuses on revenues and expenses that are controllable by the profit center manager, making it a key metric in assessing managerial effectiveness.
A profit center is a business unit within an organization that is responsible for generating revenue and controlling its own costs. The controllable margin is calculated as:
[
\text{Controllable Margin} = \text{Contribution Margin} – \text{Controllable Fixed Costs}
]
- Contribution Margin is sales revenue minus variable costs, showing how much money is available to cover fixed costs and generate profit.
- Controllable Fixed Costs are those expenses that the profit center manager has authority over, such as salaries of departmental employees or marketing expenses.
By using controllable margin, businesses can fairly assess the performance of profit center managers. Since it excludes costs that are beyond the manager’s control (such as corporate overhead or interest expenses), it ensures that managers are evaluated based on factors they can directly impact.
Why Other Options Are Incorrect:
- a. Preparing the master budget: The master budget is a comprehensive financial plan, but it focuses on overall company projections rather than individual profit center performance.
- c. Break-even analysis: Break-even analysis focuses on covering fixed and variable costs, not on evaluating managerial performance.
- d. Evaluating cost centers: Cost centers do not generate revenue; they are evaluated based on cost control rather than profit generation, making controllable margin irrelevant.
Thus, controllable margin is most useful for evaluating the performance of profit centers, helping businesses track efficiency and decision-making at the managerial level.