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ACC 202 Chapter 11

by: Marissa Sarlls

ACC 202 Chapter 11 ACC 202

Marissa Sarlls
GPA 3.75

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ACC 202 Chapter 11
Managerial Accounting (202, Wilhelm)
Jana Wilhelm
Class Notes
Accounting, acc
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This 3 page Class Notes was uploaded by Marissa Sarlls on Sunday January 10, 2016. The Class Notes belongs to ACC 202 at University of Kentucky taught by Jana Wilhelm in Spring 2016. Since its upload, it has received 12 views. For similar materials see Managerial Accounting (202, Wilhelm) in Accounting at University of Kentucky.


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Date Created: 01/10/16
Chapter 11: Performance Measurement in Decentralized Organizations Decentralization in Organizations  Decentralized organization—an organization in which decision-making authority is not confined to a few top executives but rather is spread throughout the organization  Advantages: o Managers can focus on bigger issues, such as overall strategy o Puts power in the hands of those closest to day-to-day operations o Can respond more quickly to customers o Helps train lower-level managers for higher-level positions o Increases lower-level manager’s motivation and job satisfaction  Disadvantages: o Lower-level managers may make decisions without understanding overall strategy o If lower-level managers make decisions independently of each other, coordination may be lacking o Lower-level managers may have objectives that clash with objectives of entire organization o Spreading innovative ideas may be difficult Responsibility Accounting  It links lower-level managers’ decision-making authority with accountability for the outcomes of those decisions  Responsibility center—any business segment whose manager has control over costs, revenues, or investments in operating assets o Cost center—a business segment whose manager has control over cost but has no control over revenue or investments in operating assets  EX: accounting, finance, general admin, legal, and personnel; manufacturing facilities  Often use standard and flexible budget variances o Profit center—a business segment whose manager has control over cost and revenue but has no control over investments in operating assets  Evaluated by comparing actual profit to target/budgeted profit o Investment center—a business segment whose manager has control over cost, revenue, and investments in operating assets; responsible for earning an adequate ROI  EX: GE’s Vice President  Evaluated using return on investment (ROI) or residual income measures Evaluating Investment Center Performance—ROI  Return on Investment (ROI)—a performance measure used to evaluate the efficiency of an investment NetOperating Income o ROI= Avg.Operating Assets o Net operating income (NOI)—income before interest and income taxes have been deducted  Sometimes referred to as EBIT (earnings before interest and taxes) o Operating assets—include cash, accounts receivable, inventory, plant and equipment, and all other assets held for operating purposes  NOT included: land held for future use, investment in another company, or building rented to someone else  Most companies use the net book value (acquisition cost less accumulated depreciation) of depreciable assets to calculate AvgOpAssets  Net book value decreases as accumulated depreciation increases but increases ROI o ROI=Margin xTurnover Netoperatingincome o Margin= Sales Turnover= Sales o Avg.Operating Assets o Margin is improved by increasing selling prices, reducing operating expenses, or increasing unit sales  Because of operating leverage, a given % increase in unit sales leads to even larger % inc. in NOI o Turnover represents the investment in operating assets  Disadvantages of ROI: o Must elaborate on how to increase ROI… best used as part of a balanced scorecard (concrete guide) o A manager who takes over a business segment inherits many committed costs, which may be relevant when examining the performance of a business segment but make it difficult to assess manager o A manager who is evaluated based on ROI may reject investment opportunities that are profitable for whole company if it were to have a negative impact on manager’s performance evaluation Residual Income  Residual income—the NOI that an investment center earns above the minimum required return on its operating assets o ResidualIncome=NOI−(Avg. Ass.ts x Min.Required Rateof Return) o Economic Value Added (EVA)—A concept similar to residual income in which a variety of adjustments may be made to GAAP financial statements for performance evaluation purposes  EX: Funds used for research & development are treated as investments, not expenses o Objective is to maximize residual income…this approach encourages managers to make investments that are profitable for the entire company but that would be rejected by managers who are evaluated using the ROI formula, thus RI managers tend to make better decisions  Disadvantage It can’t be used to compare the performance of divisions of different sizes so best to focus on percentage change rather than on the absolute amount of the residual income Operating Performance Measures  Measure what drives organizational performance  Delivery cycle time—the elapsed time from receipt of a customer order to when the completed goods are shipped to the customer o Deliverycycletime=Waittime+Throughputtime  Throughput time (Mnfg Cycle)—the amount of time required to turn raw materials into completed products o Process time—the amount of time work is actually done on the product o Inspection time—the amount of time spent ensuring that the product is not defective o Move time—the time required to move materials or partially completed products from workstation to workstation o Queue time—the amount of time a product spends waiting to be worked on, to be moved, to be inspected, or to be shipped o Value-added time: Process time o Non—value added time: wait, inspection, move, queue o Throughput Mnfgcycle time=Process+Inspection+Move+Queue  Manufacturing Cycle Efficiency (MCE)—Process (value-added) time as a percentage of throughput time Value−addedtime (Processtime) o MCE= Throughput (nfgCycle )ime o Any non-value added time results in an MCE of less than 1.  An MCE of 0.5 would mean that half of the total production time consists of inspection, moving, and similar non—value-added activities  In manufacturing companies, the MCE is less than 0.1 (10%), which means that 90% of the time a unit is in process is spent on activities that do not add value to the product Balanced Scorecard  Balanced scorecard—an integrated set of performance measures that are derived from and support the organizations strategy; strives for continual improvement o Strategy is a theory about how to achieve the organization’s goals o Top management translates its strategy into performance measures that employees can understand and influence  Four groups: financial, customer, internal business processes, and learning & growth o Internal business processes are like assembling a product for the customer o Financial measures are lag indicators that report on the results of past actions (top managers)  Advantage: continually tests the theories underlying management’s strategy  Incentive compensation for employees can be tied to balanced scorecard performance measures


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