Chapter 10: Decentralization and Performance Evaluation
Chapter 10: Decentralization and Performance Evaluation ACCT 2102
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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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