ACCA Performance Management (F5) Certification Practice Exam

What is the definition of controllable profit?

1. Profit before tax and depreciation

2. Profit after depreciation before tax

3. Gross profit before expenses

4. Operating profit after all deductions

The correct answer is: Profit after depreciation before tax

Controllable profit refers to the profit that can be influenced or managed by a specific manager or operation within an organization. This concept focuses on the profitability that is attributable to the decisions made by managers directly overseeing the operations of a segment or department. The definition provided as the correct answer, which is profit after depreciation before tax, aptly reflects the nature of controllable profit. By considering profit after accounting for depreciation, it acknowledges the costs associated with capital assets that managers would typically have some influence over through their operational decisions. This allows for a more accurate assessment of a manager’s effectiveness in controlling resources and costs. In contrast, options that focus on profit before tax and depreciation do not adequately measure the profitability that a manager can control because they ignore the impact of depreciation. Similarly, gross profit before expenses doesn't take into account operating expenses that can also be controlled by management, thus making it an incomplete measure of controllable profit. Lastly, operating profit after all deductions is a broader metric that includes fixed costs and not solely the controllable aspects, thereby diminishing its relevancy in assessing a manager's performance in relation to their controllable operations.