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The Possible disadvantages of treating divisions as profit centres are as follows:
1. Divisions may compete with each other and may take decisions to increase profits at the expense of other divisions thereby overemphasizing short term results.
2. It may adversely affect co-operation between the divisions and lead to lack of harmony in achieving organizational goals of the company. Thus it is hard to achieve the objective of goal congruence.
3. It may lead to reduction I the company’s overall total profits.
4. The cost of activities, which are common to all divsions, may be greater for decentralized structure than centralized structure. It may thus result in duplication of staff activities.
5. Top management looses control by delegating decision making to divisional managers. There are risks of mistakes committed by the divisional managers, which the top management, may avoid.
6. Series of control reports prepared for several departments may not be effective from the point of view of top management.
7. It may under utilize corporate competence.
8. It leads to complications associated with transfer pricing problems.
9. It becomes difficult to identity and defines precisely suitable profit centres.
10. It confuses division’s results with manager’s performance.
1. Divisions may compete with each other and may take decisions to increase profits at the expense of other divisions thereby overemphasizing short term results.
2. It may adversely affect co-operation between the divisions and lead to lack of harmony in achieving organizational goals of the company. Thus it is hard to achieve the objective of goal congruence.
3. It may lead to reduction I the company’s overall total profits.
4. The cost of activities, which are common to all divsions, may be greater for decentralized structure than centralized structure. It may thus result in duplication of staff activities.
5. Top management looses control by delegating decision making to divisional managers. There are risks of mistakes committed by the divisional managers, which the top management, may avoid.
6. Series of control reports prepared for several departments may not be effective from the point of view of top management.
7. It may under utilize corporate competence.
8. It leads to complications associated with transfer pricing problems.
9. It becomes difficult to identity and defines precisely suitable profit centres.
10. It confuses division’s results with manager’s performance.
