Chapter11:Profit Centre Analysis:
generated by profit center.
It where the management looks at the companys activities as
centers that generate companys profits.
What are the benefits of the profit center analysis to the
management?
1- Determine if certain activities of the company are
meeting its goals.
2- Identifies places for change.
3- Provides a quantitative analysis that help the
management to make decision
Source of profit of the company:
1- Minimum profit and overhead markup.
Profitmin = Budget Profit and Overhead Markup
It is used to cover costs of general overheads and
provides the minimum profits for shareholders.
2- Profit or loss during the bidding and buyout process by
the estimator.
Profitest = Price (bedding)- Budget(Project) Profitmin
3- Profit from the management of labor and equipment by
crews forepersons.
ProfitCrew = Budget Cost
Budget = budget for the work performed
Cost= Actual cost to perform the work
This profit is function of two factors which are labor and
equipment.
4- Profit from the management of project
ProfitMgt = Budget Cost
Budget = budget for entire project-budget for crews
Cost= cost for entire project- cost for crew
Exception for work performed by crews.
Equipment is included as part of management of project
when it is used by entire project and controlled by
project management.
Total Profit = Profitmin + ProfitEst + ProfitCrews + ProfitMgt
Allocation of the general overhead
Because we are dealing with profits, the overhead that should be
allocated is overhead budget or costs based on profit rather than
cash flows.
There are six methods used to allocate the general overhead in
which account of general overhead should be allocated
separately using the appropriate method of allocation as follow:
1- Based on the percentage of companys revenue
Assumption: there is relationship between the amount
of revenue generated by a profit center and the
amount of general overhead that the profit center
uses.
2- Based on the labor costs or labor hours for each profit
center.
3- Based on the material cost for each profit center. This
method is used when there is relationship between the
general overhead costs and the use of material.
General overhead costs associated with maintaining
an inventory includes items such as unallocated
material, storage costs, and delivery costs, not
charged to the job.
4- Based on the estimated usage of the general overhead
by the profit center.
5- Determine the incremental general overhead for each
profit centers with remaining costs being assigned to
the core profit center.
6- Arbitrary assignment of general overhead costs to the
profit centers.
Evaluation of profit centers:
Evaluation of each profit center should be made based on
schedule, quality and financial performance.
Crews as Profit centers
Evaluated against company standard, past performance, or
against the cost of replacing the crew with a sub-contractor.
Schedule performance: measured by determining the success
rate in meeting scheduled milestones.
Quality performance: Measured by performing standard quality
inspections and by using those results of inspection to determine
how the crew did compared to a set of standard.
Financial performance: measured against the budget, which is
used to determine the profit for center.
Project management as profit center:
Evaluations can be done by comparing their performance to
other project management teams, a minimum standard, or to an
individual goal of team. And past performance.
Schedule, quality and financial performance can be evaluated
similar as the crews performance was measured.
Furthermore is the customers stratification with management
performance in schedule, quality and finance.

Estimators as profit center:

Estimators the source of profit or loss in the company.

Estimators performance can be determined by their

performance in finding subcontractors and suppliers who
understand, are committed to, are contractually tied to
scheduling and quality standards required for the project.

Types of jobs as profit center: Customer in quadrant I:

When we treating types of jobs as profit centers. The jobs that - Companys best customers.
have set of similar characteristics are grouped together and the - Provides a high volume of work at high profitability.
profitability for this group of job is calculated and compared with - Company should expand its business on these
other groups. customers.

Jobs can be grouped by one or more of the following Customer in quadrant II:
characteristics:
- Provides occasional jobs at high profitability.
a) Similar customer base (residential customers). - Company should try increase the business of these
b) Similar use (Manufacturing). customers.
c) Similar type of building
Customer in quadrant III:
d) Similar location.
- Provides steady flow of work at low gross profit
Once the jobs groups have been settled, the profitability as
margin.
mentioned earlier will be calculated for each group and compare
- Company should try increase profit margin by
with other groups profitability.
customers by increasing price or reduce the costs.
The profitability comparison among the groups can conducted
Customer in quadrant IV:
based on two methods as follows:
- Should be moved into another one of quadrants or
1- Based on the actual gross profit margin or the actual
dropped because the customers in this quadrant will
profit and overhead markup at the completion of the
distract the management from take caring the
projects.
customers in the other quadrant.
Gross Profit
Gross Profit Margin =
Revenue Equipment as profit center:
2- Based on the return on cash invested in the projects
There are four reasons to treat the equipment by management
constructed by the profit center.
as profit center which are as follow: management must decide on
3- Based on the amount of managements time the
project consumes 1- If the company is using the equipment enough to justify
owning of the equipment or if the company would be
better off renting the equipment on a monthly, weekly,
Customers as profit centers:-
and daily basis.
Each customer is treated as profit center. To do this management 2- If company is spending so much on repair of old
needs to determine the volume and the profit attributed to each equipment or it would be better to replace it by new
customer. one.
3- If the equipment is seeing a lot of unnecessary repairs
due to abuse or poor maintenance practice.
4- If spending too much on tires or replace equipment
with tracked vehicle.