Question

In designing an effective management control system for a multinational corporation, the accountant should measure factors appropriate for each unit's level of responsibility. Which of the following measures would be appropriate for evaluating the performance of a cost center?

	a)	Return on investment
	b)	EBIT
	c)	Output volume
	d)	Residual income

Answer 1

earnings before interest and taxes (EBIT), is a measure of a firm's profit that includes all expenses except interest and income tax expenses. It is the difference between operating revenues and operating expenses. When a firm does not have non-operating income, operating income is sometimes used as a synonym for EBIT and operating profit.

EBIT = revenue – operating expenses

Operating income = revenue – operating expenses

SO , EBIT which includes operating expenses and main responsibility of cost center is to reduce cost for any corporation so EBIT and OPTIMUM, STANDARD OUTPUT VOLUME WILL BE the appropriate measures for measuring performance of cost center.