Final Review - Decentralization - Responsibility Accounting

Front 1

Decentralization

Back 1

decision making authority is not confined to a few to executives, rather it is spread throughout the organization

Front 2

Benefits of decentralization

Back 2

1)Lower level managers gain experience in decision-making. Experience before promoting later on.
2)Lower level managers are the ‘experts’ in their
area so decision are made by those who are
most knowledgeable.
3)Frees top management to concentrate their
time on strategy.

Front 3

Problems created by decentralization

Back 3

1)Lower level managers may make poor decisions.
2) The goals and objectives of lower level managers may not be the same as the objectives and goals of the organization. May benefit them, and not the netire organization.
3)Loss of control – relying on others (lower level managers) to make decisions on our behalf.

Decentralized organizations need to have strong performance evaluation techniques in place.

Front 4

Segment

Back 4

any part or activity of an organization about which a manager
seeks cost, revenue, or profit data. A segment can be an individual store, a sales territory (nw), service center (by product for ex)

Front 5

Segmented income statement

Back 5

A segmented income statement provides revenue
and cost data for each segment of the company in
a comparative fashion (side by side).

Front 6

Two keys to building segmented income statements

Back 6

1) A contribution format should be used to separate fixed and variable costs and enable the calculation of a contribution margin.
(sales - vc = cm - fixed costs = ni)
2)Traceable fixed costs should be separated from common fixed costs to enable the calculation of a segment margin.

Front 7

Traceable fixed costs

Back 7

costs arise because of the existence of a particular segment and would disappear over time (short) if the segment itself disappeared. They can be directly traced to one specific segment.

No computer division means no computer division manager

Front 8

Common fixed costs

Back 8

Common fixed costs arise because of the overall operation of the company and would not disappear if any particular segment were eliminated. They can not be directly traced to any one specific segment.

No computer division but we still have a company president

Front 9

Division’s segment margin

Back 9

subtracting the traceable fixed costs of a segment from its contribution margin.The best gauge of the long-run
profitability of a segment.

As such, common fixed costs should not be allocated to segments because doing so will reduce the value of the segment margin number in evaluating the long-run profitability of the segment.

Front 10

ROI=

Back 10

net operating income / average operating assets !!! KNOW THIS NOI/AOA
= MARGIN X TURNOVER

(income before interest and taxes)/
((beginning assets + ending assets)/2)

Front 11

Ways to increase ROI

Back 11

1. ŒIncrease Sales
2. Reduce Expenses Ž
3. Reduce Asset

all good things for the company

Front 12

Advantage to using ROI (managers)

Back 12

it forces managers to consider sales, costs, and asset usage.

if performance evaluation is based on increased sales, focus is increasing sales. no incentive to consider costs or asset usage

Front 13

Second Advantage to using ROI (decomposed)

Back 13

it can be decomposed into two meaningful components:
ROI = Margin × Turnover

Allows managers to see where problem areas lie. Then can take corrective steps to fix it.

Front 14

Margin

Back 14

Margin = Net operating income /Sales!!! KNOW THIS

Represents the percentage of your sales that become profits (after expenses have been covered). Margin provides a measure of company’s ability to withstand either higher expenses or lower sales. Higher margin = better able to withstand a downturn and still be profitable

Front 15

Turnover

Back 15

Turnover = Sales /Average operating assets KNOW THIS!!!!

How efficiently company is suing its assets to generate sales.

Higher number means fewer assets required in order to maintain sales that are generated.

Front 16

ROI criticism

Back 16

One major criticism of using ROI as a
performance evaluation method is it sometimes
leads managers to reject profitable investment
opportunities

Front 17

Residual Income - Helps address ROI criticism

Back 17

Residual Income = Net operating income - (Average operating assets x minimum required rate of return)!!!

NOI - AOA(Min rate of return)

ROI measures net operating income earned relative to the
investment in average operating assets. Residual income measures net operating income earned less the minimum required return on average operating assets.

Residual income encourages managers to make profitable investments that would be rejected by managers using ROI.

Front 18

RI Disadvantage

Back 18

The one major disadvantage to using residual income is residual income can not be used to compare the performance of divisions of different sizes.

Bigger divisions would be expected to have larger residual incomes than smaller divisions simply because they are bigger not necessarily because they have outperformed the smaller division.