Controllable Profit is the company’s net income which is under the direct control of the management in each division. It is the difference between revenue and controllable expense. The controllable expenses include variable cost, fixed cost, and other operating expense which is incurred to support the business operation and under divisional control.
Profit is usually the turnover that the company makes in excess of the total expense. The expense includes the cost of goods sold, operating expenses, and tax expenses. It represents the amount left over for the company to reinvest or share with the shareholders. The calculation is straightforward for a small company operating in one place. Revenue is reflected in company performance and it will link with the cost of goods sold, the more revenue we make, the higher cost of goods sold. The other operating expenses are the management’s decision and they must be in line with the business operation as well.
However, something changes when the company is divided into different divisions or segments. Each division’s revenues will include both division’s performance and some have come through the head office. Controllable revenue is the revenue generate by the division.
Similar things happen to the operating expense, the head office may charge some expenses such as salary of head office staff who work for all divisions, head office building cost, interest expense, and so on. As these expenses paid by the head office, so they must be allocated to all divisions to reflect their performances. The controllable expense of the division must exclude any expense allocated by the head office.