Chapter 18 – Strategic Performance Measurement: Cost Centers, Profit Centers, and the Balanced Scorecard
18–62 (continued -2)
The formulas for the above spreadsheet are as follows:
Total Net Sales ($6,875,000 Hartford; $5,625,000 Boston) 12500000
Fixed Costs
Partly Traceable and Controllable 400000
Partly Traceable but Noncontrollable 350000
Nontraceable Costs 325000
=SUM(D3:D5)
Total Net Sales
Boston 5625000
Hartford Total Sales 6875000
Hartford Clothing 0.6
=A10 Cycle&Run 0.4
Cost of Goods Sold (Variable) Percent of Sales
=A8 0.6
=A10 =B10 0.7
=A11 =B11 0.5
Variable Operating Costs Percent of Sales
=A14 0.3
=A15 =B15 0.25
=A16 =B16 0.35
Total Variable Costs Percent of Sales
=A19 =D14+D19 =60% + 30%
=A20 =B20 =D15+D20 =70% + 25%
=A21 =B21 =D16+D21 =50% + 35%
Fixed Controllable Costs Percent of Total Cost
=A19 0.45
=A20 Total 0.4
=B10 0.5
=B11 0.3
Could not be Traced to Clothing or Cycling at Hartford 0.2
Could not be Traced to Boston or Hartford 0.15
Fixed Noncontrollable Costs Percent of Total Cost
=A14 0.4
=A15 Total 0.5
Income Statement by Business Unit
Combined
Company Not Allocated =A8 =A10
Net Sales =E48+F48 =D8 =D9
Variable Costs:
COGS =E50+F50 =E48*D14 =((D10*D15)+(D11*D16))*F48
Operating Costs =E51+F51 =D19*E48 =((D10*D20)+(D11*D21))*F48
Less: Noncontrollable Fixed Costs =D4 =D4*D42 =D4*D37 =D4*D38
Contribution by Profit Center =C56-C58 =C59-E59-F59 =(E56-E58) =(F56-F58)
Less: Nontraceable Costs =D5
Operating Income =C59-C61
Breakdown of contribution: =F47
=F47 Not Allocated =B10 =B11
Net Sales =F48 =F48*D10 =F48*D11
Variable Costs:
COGS =F50 =D15*E68 =D16*F68
Variable Operating Costs =F51 =D20*E68 =D21*F68
Total Variable Costs =F52 =SUM(E70:E71) =SUM(F70:F71)
Contribution Margin =F53 =(E68-E70-E71) =(F68-F70-F71)
Chapter 18 – Strategic Performance Measurement: Cost Centers, Profit Centers, and the Balanced Scorecard
18–85
18-62 (continued -3)
2. The results of the contribution income statement analysis shows
that both stores are profitable and approximately equally
profitable as measured by contribution by profit center ($242,500
for Boston and $283,750 for Hartford). After nontraceable fixed
costs OWI’s operating income is $106,250, less than 1% of total
sales, a relatively low operating profit. The profit breakdown for
the Hartford store shows that the contribution of the Cycle & Run
center accounts for most of the profit for the store. Given the cost
estimates, this is not surprising. Note that the variable cost
percentages for the two stores is as follows. Adding the variable
The analysis shows that management needs to look for ways to
control variable costs, both in cost of purchases for resale and in
operating costs. A good start might be to research industry
publications and trade organizations to find benchmark data for
Chapter 18 – Strategic Performance Measurement: Cost Centers, Profit Centers, and the Balanced Scorecard
18–86
18-63 Choice of Strategic Business Unit (20 min)
1. The new office of sustainability is a support department and as such
should be evaluated as a cost center, and since the outputs of the
department will be difficult to measure, at least initially, it should be
established as a discretionary cost center. The department would
likely search for alternatives in the size and type of engines in the
A different approach would be to consider the department a
profit center based on the idea that effective steps to reduce carbon
emissions could not only save the firm fuel costs, but could also be
used to generate revenue. This could be accomplished by using
achievements in sustainability to attract new customers who value the
reduced costs and also value the positive effects on the environment.
2. This new department would best be evaluated as a profit center since
its mission is to develop new products and to refine existing products
in order to attract new customers and increase sales. The costs of
new department should be matched against the increased revenues
3. This department is best evaluated as a discretionary cost center. The
goal of the department is to identify risk and to make plans
accordingly. It would be difficult to tie this activity to revenues.
Chapter 18 – Strategic Performance Measurement: Cost Centers, Profit Centers, and the Balanced Scorecard
18–87
18-64 Research Assignment; Sustainability (45 min)
The project upon which the article is based is a research project funded by
the Institute of Management Accountants (IMA). Suggested solutions for
each of the discussion questions follow:
1. What is the difference between local and corporate decision making,
and what is the significance of the difference for sustainability?
In the article, Epstein et. al. refer to local versus corporate decision making.
Local decision making is done at the level of business units, geographical
units (such as the State of Ohio), or facilities. The corporate level is at the
company headquarters. The difference is important because, as the
article suggests, many sustainability-related decisions are made at the local
executive responsible for corporate sustainability goals will set the tone and
the objectives, but ultimately many of the decisions that involve
sustainability are made at the local level.
Corporate decisions would include the decision to replace a fleet of less
efficient vehicles with more efficient vehicles, or to refit a plant for more
2. Study the Corporate Sustainability Model in Figure 1. Based on this
study, do you think sustainability should be managed by means of a
cost center, profit center, the balanced scorecard, or some other
method, and why? (Figure 1is shown on the following page.)
Chapter 18 – Strategic Performance Measurement: Cost Centers, Profit Centers, and the Balanced Scorecard
18–88
18-64 (continued –1)
Each of these options could be supported in some ways. The cost center
would be appropriate for an organization that is managing its sustainability
program as a management function, much like other management
18–89
18-64 (continued –2)
A profit center approach would recognize that, as many companies have
discovered, the efforts to improve sustainability have a positive impact on
profitability. In this case, a variation of the cost center, the processes of
the center are carefully defined. The difference is that the sustainability
profit center is expected to provide improvements in operations that reduce
measures could simply be part of the scorecard along with the
environmental and other sustainability measures.
3. Identify two of the leading companies in the area of sustainability and
explain why you think each of these companies has chosen to take a
leadership role in sustainability.
The article identifies four companies: Nike, Procter & Gamble (P&G), The
Home Depot and Nissan. The articles notes that these companies have a
reputation for leadership in sustainability and therefore the authors chose
18–90
18-64 (continued –3)
At The Home Depot and Nissan, sustainability was top-down, driven by
strategic planning, coordinated with the business units, with the goal of
both corporate responsibility and cost reduction.
4. Review Exhibit 18.4 in the text. Do you think sustainability is best
managed as part of an informal or a formal type of management
control system? Briefly explain your answer.
5. Explain briefly the role of leadership in sustainability management.
Leadership is critical, as noted in the article. Setting a clear tone and
policy at the corporate level can reduce conflicts and miscommunication at
6. Explain briefly the role of organization culture in sustainability
management.
The company’s culture, throughout the organization also plays a critical role
in achieving the company’s sustainability objectives. At Home Depot for
example, the culture of willingness to take a risk and the passion for
Chapter 18 – Strategic Performance Measurement: Cost Centers, Profit Centers, and the Balanced Scorecard
18–91
18-64 (continued -4)
Additional Source: See also an excellent coverage of sustainability at
P&G in the article by Cristiano Busco, Mark. L. Frigo, Emilia L. Leone, and
Angelo Riccaboni, “Cleaning Up,” Strategic Finance, July 2010, pp. 29-37.