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Chapter 10: Decentralization and Performance Evaluation

by: Breana Carey

Chapter 10: Decentralization and Performance Evaluation ACCT 2102

Marketplace > Georgia State University > Accounting > ACCT 2102 > Chapter 10 Decentralization and Performance Evaluation
Breana Carey
GPA 3.0
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These are the notes from chapter 10 in the accounting book :) She posted the final exam study guide up and I will have that out to you all by next Saturday!
Kathleen S. Partridge (P)
Class Notes
Accounting 2102, chapter 10, class notes




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This 4 page Class Notes was uploaded by Breana Carey on Friday April 15, 2016. The Class Notes belongs to ACCT 2102 at Georgia State University taught by Kathleen S. Partridge (P) in Fall 2015. Since its upload, it has received 106 views. For similar materials see PRIN OF ACCT II in Accounting at Georgia State University.


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Date Created: 04/15/16
Chapter 10: Decentralization and Performance Evaluation Sunday, April 10, 2016 23:41 Chapter 10: Decentralization and Performance Evaluation    Centralized vs Decentralized o Centralization  is when the organizational structure in which decision making  authority for the whole organization rests on the hands of one single person or a small group of people.  o Decentralization is which decision making authority is dispersed throughout the  organizational structure.  Advantages:  Disadvantages:  Managers at the operational   Communicating strategies from  level have a good view of the  top management down to the  organization and it's day to day  organization can lead to  operations duplication of evaluations within   Managers can groom the next  management.  generation of managers by giving   When decision making is spread  lower level managers a chance to  to lower level managers with no  develop their skills experience managers will decline  the project  Responsibility accounting  is when managers are evaluated on on the things that they can control   A  cost centeris a organizational unit whose manager is only responsible for the costs  incurred with a single unit o Service departments and production departments which don't generate revenue are called "cost centers"   A  profit center is when a manager is in charge of all costs and revenues incurred while  operating a project.   A investment center manager  is expected to invests assets that generate a profit     Segment Evaluation o A segment  of a organization is any part of the organization that management will  want to evaluate.  o A segment margin income statement will include expenses that are variable and  that are fixed and only will include traceable fixed costs Revenue in Sales (Variable Expenses) (Cost of Good Sold) = Contribution Margin (Traceable fixed costs) (Selling and Administrative) = Segment Margin (Common Fixed Expenses) =Net Operating Income    Return on Investment measures a rate of return generated by a investment on assets  ROI = operating income ( or segment margin) / average operating assets  ASC280 'segment margin' provides generally accepted accounting principle that require  companies to escort selected information about operating segments  o Return on Investment is still widely used today to evaluate a large range of  investment options from manufacturing plants to corporate training programs  o Return on investment measures the rate of return generated by an investment in  assets  ROI = operating income (segment margin) / average operating assets   Some unit managers use the segment margin because it represents revenues and  expenses that are directly traceable to the operating unit and controllable by the  manager.  Average Operating Asset = beginning asset balance + ending asset balance / 2   The assets to include with this operation are those that were actually used in  operations among them are cash, account receivable, inventory, property and  plant.     The DuPont model of the expanded formula for ROI is usually called the DuPont model  and it helps identify the actions needed to increase the ROI.  ROI (DuPont) = Margin operating income(or segment margin) / sale  revenue x asset turnover sale revenue / average operating asset   ROI can be improved by any combination of the three separate actions (1) increase sale  revenue (2) decreasing assets (3) decreasing expenses  Residual Income and EVA o Residual income  is income that is earned above a specified minimum level of  return Residual income = operating income (or segment margin) ­ (average assets x required minimum rate of return) o Because residual income is an absolute measure that is stated with absolute dollars  using it to compare divisions of different sizes is not ideal o Residual income is better for measuring evaluation while ROI is more acceptable to  compare divisions  o Economic Value Added (EVA)  was developed by a global consulting firm as a  variation of residual income that measures economic profit.  EVA = Net Operating Profit ­ [invested capital x weighted average cost  per capital]   Steps:   1) Calculating Net Profit: you need to get net operating profit by  subtracting income taxes from operating income  2) Calculating investing capital: the amount of invested capital is its total  assets minus current liabilities   3) Calculate the WACC: (weighted average cost per capital) means the  combined rate of return required by all capital investors  4) Lastly you calculate the EVA which is:  EVA = Net Operating Profit ­ [invested capital x weighted average cost  per capital]     Transfer Pricing  is the price exchange between divisions  o When organizations choose to decentralize their operations divisions may end up  exchanging goods and services with one another rather than with external suppliers  o Intermediate product is a product that is purchased for the purpose of making  another product rather than for sale to an end user o The most unbiased transfer price is the arket based price  wish is determined  by monitoring similar trades that happen in the marketplace between unrelated  parties.   The alternative is a cost based price or the cost to produce an intermediate  product o To provide some level of profit to the seller the two divisions may agree to a cost  plus based price in which some markup is added to the products cost to arrive at the  transfer price.  o And lastly the final option is a gotiated price one that is agreed by both the  buyers and the sellers  Unlike a dictated cost price this leaves the decision making up the division managers o Determining the minimum transfer price you want the one that will motivate  managers to behave the best interest of the firm as a whole  Minimum Transfer Price = Variable cost to produce (or sell) +  Contribution margin forgone from the transfer 


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