The wrong measure for the right manager

The matching table

Everything in this module converges on one table: the centre type, what its manager controls, and therefore the measure she should be judged on.

Centre                   Controls                     Right measure                              Wrong measure (and why)
Cost centre              cost at a given output       cost vs FLEXIBLE budget at actual output   profit (sets no price); static budget (wrong volume)
Discretionary cost       spending; output unmeasured  budget adherence + qualitative results     cost per unit of output (no unit exists)
Revenue centre           revenue, given a cost budget revenue vs budget; sales mix                cost alone (its decisions move revenue)
Profit centre            revenue and costs            controllable profit — segment margin       profit after allocated corporate costs
Investment centre        revenue, costs, assets       ROI and residual income                    cost or profit alone (ignores the assets)

Two entries carry earlier lessons. A cost centre is judged against the budget flexed to the output actually produced (Lesson 8.7): the assembly plant that built 11,000 frames because the stores ordered 11,000 must not be blamed for missing a 12,000-frame cost budget. A profit centre’s measure is segment margin — revenue less variable costs less the fixed costs traceable to the segment — and never profit after an allocation of corporate costs the manager cannot touch. Module 12 uses the same segment margin for keep-or-drop decisions.

Three mismatches at Boreal Bikes

The assembly-plant manager judged on plant profit. The plant sells frames to the stores at a transfer price head office sets and builds the volume the stores order. Its manager controls neither price nor volume, so “plant profit” is two numbers she cannot move wrapped around one she can. The measure fails controllability, and three missed targets say nothing about her. Fix: cost per frame against a budget flexed to the frames ordered, paired with quality and on-time delivery KPIs so that cutting cost does not mean cutting corners.

The HR manager judged on cost per hire. Cost per hire is measurable, timely and cheap to collect — and easy to game: hire the cheapest candidate, skip the reference check, run no assessment. HR is a discretionary cost centre; there is no formula linking its spending to the quality of the people it brings in. Fix: budget adherence plus qualitative results — retention of hires at twelve months, time to fill, hiring-manager satisfaction.

The store manager judged on ROI after head-office allocations. She controls neither the building (head office signed the lease) nor the allocation (head office decides the formula), so the denominator and part of the numerator are outside her reach. A store is a profit centre. Fix: controllable profit — segment margin before any allocation — and, if the board wants asset discipline, inventory turnover, which she does control.

The diagnosis, in one paragraph

When the exam gives a scenario, the answer has a fixed shape: classify the centre by what the manager actually controls; name the elements of the current measure she does not control; recommend the measure from the table, flexed to actual output where a cost centre is involved; pair it with a non-financial KPI so that the new measure cannot be gamed by hurting quality or service; and connect the fix to motivation — a manager judged on a number she can move will move it. Name one risk of the fix. A cost-only measure invites quality cuts; that is why the pairing is part of the answer, not an afterthought.