Efficient Management of Cost Centers in an Organization Research Paper

Efficient Management of Cost Centers in an Organization - Research Paper Example EVA accepts that capital is not available for free and imputes a notional value on the capital used by a business unit after considering the inherent risk involved in a business and the weighted average cost of total capital employed in the business. The earnings for the year are then examined in detail and any unusual or abnormal earnings and expenditures are removed to derive the normal earning for that year. If such adjusted earning is more than the cost of capital, the organization has created value; else, it has destroyed it (Grant 2003). Thus, EVA encourages managers to increase operating profits without injecting fresh capital, finding avenues for investment that would generate higher returns and reallocating funds from less profitable ventures to ones that are more profitable. This approach does not depend merely on the proper management of the balance sheet but also on the level of efficiency of an organization. If the balance sheet is not properly managed, a company might c arry a lot more capital than it actually requires thus unnecessarily increasing the desired levels of operating profit that would just match the weighted average cost of capital. Again, if the company is not run efficiently it would not be able to earn sufficient operating profits so as to qualify as a value creator. Definitions of cost centres vary from country to country and it would be worthwhile to investigate how cost centres are perceived in Germany and the United States. In Germany, Grenzplankostenrechnung (GPK), a common approach to cost accounting in that country, defines a subunit of an organization as a cost centre if the output of that subunit can be measured by a single unit.