12 Bbma3203 T8

T op i c X Performance
8 Evaluation in
Decentralised
Firms
LEARNING OUTCOMES
By the end of this topic, you should be able to:
1. Explain responsibility accounting and types of responsibility
centres;
2. Discuss the reasons why firms choose decentralised structure;
3. Elaborate the need for segmented reporting;
4. Calculate return on investment, residual income and economic
value added;
5. Apply balanced scorecard for performance measurement; and
6. Identify the steps that must be considered for a benchmarking.
X INTRODUCTION
In a small business that is a solely owned and run by its proprietor, the question
of monitoring staff is usually done directly by the proprietor because he is
physically close to the operationÊs premise. However, imagine a huge
supermarket like Jaya Jusco which has a network that spans throughout
Malaysia. Every Jaya Jusco supermarket for example, will have its own manager
with various departments under its management. There will also be various
levels of management, for instance, in the Jaya Jusco Seremban 2, that are needed
to run the daily operations of the supermarket. How does a firm that has many
branches like Jaya Jusco, monitor each outlet and manage every one of these
outlets? How do they ensure that each outlet will operate towards attaining the
Copyright © Open University Malaysia (OUM)
TOPIC 8 PERFORMANCE EVALUATION IN DECENTRALISED FIRMS W 197
same Jaya Jusco goals? Is there a possibility of the existence of competitiveness

among outlets and the spirit of Âwe-nessÊ among outlets?
Actually, when an organisation expands and has many staff, it is impossible for
senior management to directly monitor all their staff or to make all decisions
related to business operations at different locations. It is appropriate for the
senior management to delegate authority for decision-making to their immediate
staff or managers at branch level. This topic will discuss the delegation of
responsibility and how monitoring needs to be done so that the original goals of
the organisation is maintained at all departments or branches, even though at
different locations.
8.1 RESPONSIBILITY ACCOUNTING

In this section, we will learn about responsibility accounting. How does an
organisation determine type of responsibilities of a department or its branch?
In general, a company can be arranged according to its responsibility. The

organisational chart usually begins with its chief executive officer, middle
managers and junior managers and flows down to its other staff. The
management system often conforms to this line of responsibility and formulates
responsibility centres so that a set of certain activities can be made accountable to
certain managers to facilitate monitoring and control.
A responsibility centre is one part or segment in an organisation where the

manager will be responsible for activities of that segment. Responsible
accounting is therefore a system that measures revenue for each responsibility
centre according to the information needed by the managers to run the
operations at the centre.
In general, ther are four types of responsibility centres practised by an

organisation, as shown in Figure 8.1.
Figure 8.1: Four types of responsibility centres

198 X TOPIC 8 PERFORMANCE EVALUATION IN DECENTRALISED FIRMS
To know further about each type of responsibility centres, please refer to

Table 8.1.
Table 8.1: Types of Responsibility Centres
Types of Responsibility Centres

(a) Cost Centres
This is a responsibility centre where its manager is responsible for the incurrence of
costs. For example, the Assembly Department at a factory is a cost centre. The
supervisor will be able to control the incurrence of cost in the assembly of goods at
the factory but has no authority in setting the price of those goods. For the puprose
of performance evaluation, the supervisor will be evaluated on how far costs are
controlled.
(b) Revenue Centres
This is a responsibility centre where its manager is responsible only for the revenue
or sales attained. For example, the Marketing Department manager has the
authority only in setting price and planning sales. It is a revenue centre and for the
purpose of performance evaluation. The manager will be evaluated based on total
sales achieved and direct costs from the Marketing Department.
(c) Profit Centres
This is a responsibility centre where its manager is responsible for both incurrance
of costs and the revenue achieved. For example, the manager of a hotel is made
accountable for revenue and incurred costs of the hotel. Usually, they will be
evaluated by comparing target profits and the actual profit achieved.
(d) Investment Centres
This is the responsibility centre where its manager is responsible for revenue, costs
and investments made. For example, the manager of a multinational subsidiary is
usually responsible for the profit achieved by the subsidiary and has the authority to
make capital investment decisions such as the closure of factory or the termination of
a production line. They will be evaluated based on the responsibility given. Among
the usual measurement used is the return on investment or residual income. Both
measurements will be discussed in this topic in the following sections.
ACTIVITY 8.1
If the marketing manager makes a decision to offer frequent price
discounts to customers and sales continues to increase, what is the
impact on the Production Department?

8.2 MEASURING COST OF QUALITY

An organisation that has many responsibility centres will usually choose to
manage their many and perhaps complex activities by making either centralised
or decentralised decisions. If the decision is centralised, only top level managers
will make the decision whereas middle and lower level managers will execute
that decision. Conversely, in a decentralised firm structure, decison-making
empowerment is not centralised to several top managers only but is spread
throughout the organisation.
The authority for decision-making is delegated to the lower levels. A very

decentralised structure will empower the managerial level and lower, or even the
workers themselves to make decisions. Conversely, an extremely centralised
structured organisation gives minimum decision-making powers to the lower
level managers. Most organisations will lie between these two extremes although
the current trend favours a more decentralised structure. Why is this so?
There are several reasons that would lead an organisation to choose this
structure. Among the advantages of a decentralised structure are as shown in
Table 8.2.
Table 8.2: Advantages of Decentralised Structure
Advantages of Decentralised Structure
(a) Senior managers will be able to focus on decision-making at a higher level because
they are less burdened by daily matters. Therefore, focus can be given to strategic
matters and not on operations.
(b) Junior managers often possess latest and more detailed information about local or
localised conditions compared to senior managers. Decision-making related to
operations is usually done better by managers at the lower level.
(c) Enables speedier feedback to customers when empowerment of decision-making is

delegated to junior managers.
(d) Decentralised structure gives opportunity to junior managers to gain experience in

decision-making as a preparation when they are promoted to higher level posts.
(e) Giving or delegating responsibility to lower level managers will increase

motivation of the said managers and following that, will increase job satisfaction
and encourage better performance in the future.

Even though the advantages of a decentralised system is very obvious, a few

factors have to be considered by management in executing their tasks because a
decentralised system too has a few disadvantages. Among them are as shown in
Table 8.3.
Table 8.3: Disadvantages of Decentralised Structure
Disadvantages of Decentralised Structure
(a) Junior managers may possess an advantage in acquiring more detailed information
on local operations or their job scope. However, senior managers have more
information and understanding about the organisation as a whole and the strategies
to be executed. Therefore, junior managers may make decisions without a clear
understanding of the overall picture. The effect being, decisions made may not be in
line with the organisationÊs needs.
(b) The junior managerÊs objective may differ from the overall objective of the
organisation. They may want to strengthen their department or branch to the
detriment of other departments or branches.
(c) For example, Syarikat Maju JayaÊs branch in Johor would like to increase the size of
their market to extend to the whole of southern of Peninsular Malaysia. Because
Syarikat Maju Jaya already has a branch in Melaka, this planned expansion by the
Johor branch will be considered as a threat to the Melaka branch. What is being
planned by the Johor branch may not increase the overall profit of the company,
whilst creating unwarranted conflict among these two branches.
(d) In an extremely decentralised system, coordination among department and branch

managers will be less.
(e) In general, it is difficult to pull off an extremely decentralised system because there
may be an individual in the organisation who is a great thinker and may contribute
for the benefit of all. If an order is not centralised, these ideas may not be channeled
systematically and benefit other sections in the organisation.
The disadvantages outlined in Table 8.3 can be overcome if the companyÊs

strategies are outlined clearly and communicated throughout the organisation.
Effective information system among branches will also give room to the
channeling of creative thinking to everyone in the same organisation.
Other than that, managers must be rewarded to motivate them to achieve the
overall goals of the organisation so that the objectives of the department or
branch do not deviate from the organisationÊs desires.

Goal congruence occurs when managers in a sub-unit in an organisation are

commited in achieving the goals of the organisation and at the same time fulfill
personal goals. This is what should be achieved by the organisation to ensure
management efficiency. One of the ways in ensuring that the manager of the
responsibility centre is still executing objectives that are in line with the
objectives of the organisation as a whole or to achieve this congruence is through
the formulation of an effective performance evaluation system.
SELF-CHECK 8.1
How does a multinational organisation benefit from a decentralised
firm structure of its management?
8.3 DECENTRALISED FIRMS AND SEGMENTED

REPORTING
We have learned about the structure of a decentralised firm. Now, we will learn
about decentralised firms and segmented reporting. In ensuring effective
disemination of information, decentralised firms require segmented reporting in
addition to the firmsÊ comprehensive report. The segment meant here may be
certain sections of the organisation or specific activities where information on
costs, revenue or profit be made known to the manager.
In this section, you can see how an income statement for a segment is presented.
This statement is useful in assisting managers in analysing profit for each
segment and measure performance of the segment managers.
To form an income statement according to segments, costs must be separated

between the firmsÊ general costs allocated to that segment and costs that can be
trace directly to the segment.
For example, in a supermarket consisting of stationery and childrensÊ clothes

departments. The cost of managerÊs wage for the stationery department can be
trace directly to the department, whereas the wage of the supermarket manager
is a general cost that is allocated for both the stationery and childrenÊs clothes
departments. The segmentÊs direct cost is a controllable cost from the decision-
making angle of a segment, whereas the general cost allocated cannot be
controlled easily when a decision is to be made about the reported segment.
For example, if the supermarket decides to close the stationery department, the
department managerÊs wage can be eliminated. However, the supermarket

managerÊs wage is still incurred because he continues to manage other

departments in the supermarket.
Income statement for a segment is usually prepared according to the contribution

margin format which separates fixed and variable costs in its presentation. This is
because, most indirect costs that must be separated from the profit segment report
are fixed costs. Information from the contribution margin format is easier to pass on,
compared to an income statement prepared using the absorption approach.
Table 8.4 shows an example of segmented income statement of a supermarket.
Table 8.4: Example of a Segmented Income Statement

ChildrensÊ
Stationery
Clothes Supermarket
Department
Department
Sales RM150,000 RM100,000 RM250,000
Variable cost
• Cost of variable goods sold 60,000 30,000 90,000
• Other variable expenses 15,000 10,000 45,000
Total variable cost 75,000 40,000 115,000
Contribution margin 75,000 60,000 135,000
Direct fixed cost 45,000 40,000 85,000
Segment margin 30,000 20,000 50,000
General expenses 42,500
Net income RM7,500
In reference to Table 8.5, fixed cost is differentiated between direct fixed cost
(that is cost that can be trace directly to the segment) and the general fixed cost
(that is cost allocated to the segment). Fixed costs which can be trace directly to
the segment is the fixed costs incurred as a result of the existence of that segment.
For example, wage expense of the stationery department manager as explained
before this. That is the reason why, if the segment is closed, the expense is
avoidable.

However, general fixed costs are those that support the operations of more than
one segment, for example, the supermarket managerÊs wage expense. This total
expense will not reduce even though the stationery segment is closed.
The separation of both elements of fixed costs is important to allow the segment
margin to be calculated effectively for each segment in the company. Information
on this segment margin will assist the manager in evaluating long-term profits of
a segment and is more meaningful for the purpose of future performance
evaluation of that segment.
8.4 MEASURING THE PERFORMANCE OF

INVESTMENT CENTRES
Next, we will discuss how to measure the performance of investment centres.
What is the most suitable measurement to describe the performance of
investment centres?
There are three performance measurements for investment centre that are usually
used, namely:
(a) Return on investment;
(b) Residual income; and
(c) Economic value added.
However, you will have to differentiate between performance evaluation of

departments or branches with performance evaluation of the department or
branch manager. This is because, a department may be showing satisfactory
performance even though it has an inefficient manager due to market conditions
or business locations.
However, there is a possibility that an efficient manager will be moved to a

problematical branch to initiate changes. The branch performance may not
change in the short-term, but it is not due to the poor performance of the
manager. In this section, what will be explained is related to the performance of
responsibility centres and not their managers. Each one is explained as follows.

8.4.1 Return on Investment

The first performance measurement of investment centres is return on
investment. Investment centres are accountable for profit and capital invested to
generate profit. Therefore, the performance of the investment centre should be
measured by relating the two. One method is by calculating profit generated for
each amount of capital invested through the measurement of return on
investment. It can be calculated using the following formula:
Operating income
Return on investment =
Average operating asset
Operating income refers to earnings before deducting interest and tax expenses.
The calculation of operating income is used so that it is consistent with the
denominator in this formula, which is operating assets.
Operating assets are all assets obtained to generate operating income including
cash, accounts receivable, inventory, land, building and equipment. Non-
operating assets are not taken into account in the calculation, for example, land
owned for future use, building rented to others or investment in other
companies.
Example 1
Syarikat Cikucomel is a producer of local toys. The Southern Branch which

produces remote control toys reports its revenue for the year 20X6 as follows:
Operating income RM300,000

Sales revenue 2,000,000
Average operating asset 3,000,000
Average balance in current liabilities 20,000
CikucomelÊs weighted average cost of investment is 9 percent, tax rate is 30

percent and minimum required return on investment is 9 percent.

Using the formula shown in Example 1, you can calculate the return on
investment:
Operating income
Return on investment =
Average operating asset
RM300,000
=
RM3,000,000
= 10%
From the above example, CikucomelÊs return on investment is 10 percent. You

will see how the calculation can be easily done. However, this formula, when
separated to margin ratio and turnover, will provide additional information.
Margin is the operating income ratio to sales. It shows available sales for interest
expenses, tax and profit. Meanwhile, turnover is sales divided by average
operating asset. It shows how productive an asset is when used to generate sales.
Using Example 1, we can recalculate the return on investment with the margin
and turnover formula.
Return on investment = Margin x Turnover

Operating income Sales
=
Sales Average operating asset
RM300,000 x RM2,000,000
=
RM2,000,000 RM3,000,000
= 15% x 67%
= 10%
Even though the figure on return for fixed investment is the same as the calculation
before this, additional information such as how productive an asset is used can be
shown clearly by this formula. This information will assist the manager in
understanding change or maintaining the performance of a branch or department.
For instance, the return on fixed investment is set for two years, but the actual
margin increases. How does this happen? This is because a decreasing return may be
due to assets such as the increasing amount of inventory held by the company.

Matters such as this must be taken into consideration by the manager to remain
efficient in his management and not just to provide aggregate information that is
not as meaningful in certain situations.
Next, the manager can plan how to increase the return on investment through
margin increase or turnover or both.
The measurement of performance using the measurement of return of

investment has a few advantages, among others:
Advantages of Return on Investment
(a) It encourages the manager to focus on the relationship among sales, expenses and
investment, as should be done by an investment centre manager.
(b) It encourages the manager to focus on cost efficiency.
(c) It encourages the manager to focus on operating asset efficiency.
However, extreme emphasis on return of investment figures can cause myopic

behaviour. Among the disadvantages of this measurement are:
Return on investment = Margin x Turnover

Operating income Sales
=
Sales Average operating
asset
Disadvantages of Return on Investment
(a) It can result in limited focus on the profit of the branch which may sacrifice the
interest of the organisation as a whole.
(b) It results in the manager focusing on the short term performance sacrificing the
long term interest.
You can refer to the return on investment formula where the denominator is the
operating asset. There is a possibility where the result of an investment in asset to
increase the efficiency of a branch can only be seen in the long-term.
However, in the short-term, the investment will result in an increase in the total
operating asset and following that, reduce return on investment. If bonus given

to a branch depends on the return on investment figure, would a rational

manager let this figure fall?
The return on investment measurement may be used mostly in evaluating

performance, but it is not a perfect tool. The manager may try to increase this
measurement without taking into account the companyÊs strategy.
ACTIVITY 8.2
Is it appropriate for a corporate asset of which the amount is allocated to
the branch, be taken into account in the total operating asset of the
branch for the purpose of calculating return on investment for that
branch?
8.4.2 Residual Income

Another approach in measuring performance of an investment centre is through
the use of residual income figures.
Residual income is the operating income that can be derived by an investment

centre in excess of the minimum returns required by its operating asset.
Formula-wise, residual income is:
Residual = Operating ă ( Average operating x Minimum rate of )

income income asset required returns
Residual income shows a figure in ringgit total and not in the form of a ratio such
as return on investment. While the rate of minimum return required is an
estimated rate by the management accountant, the rate among others, rely on the
risks of capital invested to generate income.
Using Example 1, Syarikat Cikucomel, you can calculate the residual income of
the Southern Branch by using the above formula.
Residual = Operating ă ( Average operating x Minimum rate of )

income income asset required returns

= RM300,000 ă ( RM3,000,000 x 9% )
= RM300,000 ă RM270,000
= RM30,000
Even though the calculation of residual income takes into account the rate of
required return by the firm for investment in its assets, one apparent weakness is
when this measurement cannot be used to compare performance among different
sizes of investment centres.
Assuming that Syarikat Cikucomel has a Northern Branch that produces toy cars.
The Northern BranchÊs operating income is RM600,000 and average operating
asset is RM5,000,000. The minimum rate of return required is 9 percent. The
residual income is calculated as follows:
Residual = Operating ă ( Average x Minimum rate of )

income income operating asset required returns
= RM600,000 ă ( RM5,000,000 x 9% )
= RM600,000 ă RM450,000
= RM150,000
Can it be said that the performance of the Northern Branch is better than the
Southern Branch? If you examine it, the difference is caused by the bigger size of
the Northern Branch and appropriately the return from the use of asset is
similarly large.
In short, performance measurement using the return on investment or residual

income cannot provide a perfect evaluation. Perhaps due to this reason, most
companies use both measurements for the purpose of performance evaluation of
investment centres.

8.4.3 Economic Value Added

The final approach is the economic value added. An adaptation from the
measurement of residual income is the measurement of economic value added
which is the operating profit after tax, less the total annual cost of capital. It is
different from residual income through two aspects; current liability will be
deducted from the total assets of investment centres and the weighted average
cost of capital is used in the calculation. The formula of calculating the economic
value added can be illustrated as follows:
Economic Operating Total assets of Current liability Weighted

value
added
= income ă
after tax
[( investment
centre
ă of investment
centre
) X average cost
of capital
]
Using Example 1, Syarikat Cikucomel, you can calculate the economic value
added of South Branch using the above formula.
Economic Total assets Current liability

value
added
=
Operating income
after tax
ă
[( of investment
centre
ă
of investment
centre
) Weighted
× average cost
of capital
]
= [RM300,000 × (1-0.3)] ă [ (RM3,000,000 ă RM20,000) × 9% ]
= RM210,000 ă [ (RM2,980,000) X 9% ]
= (RM58,200)
From the calculation, it shows that the Southern Branch does not contribute to
the economic incremental value of Cikucomel.
SELF-CHECK 8.2
What are the differences and similarities between calculations of

performance measurement using residual income and economic
incremental value added?

8.5 BALANCED SCORECARD

In this section, we will discuss about the balanced scorecard. Have you ever
thought about the impact on a managerÊs behaviour when the measurement of
performance evaluation uses only accounting figures?
Performance measurements such as return on investment, residual income and

economic value added are frequently used and are important to the organisation.
However, to look at performance from a purely financial angle does not provide
a complete picture of the organisationÊs overall performance. You may have
heard of non-financial performance measurement which was formulated to take
this into account. For example, at a factory, the number of defective units during
the production process must be monitored for the purpose of efficiency in cost
and quality management.
Therefore, records must be kept and measurement created to monitor the

number of defective units at a certain period of time. Other than that, service
organisations such as hotels, for example, have to know whether the customers
using their services are satisfied or otherwise because it can affect the
profitability of the hotel in the future. Thus, a measurement of customer
satisfaction is created and measured through feedbacks and questionnaires
usually placed in hotel rooms.
Moreover, measuring only financial performance hardly motivates junior

managers. They generally do not see direct effect of their actions on the change in
overall profits of the company. Therefore, non-financial measurement such as the
number of defective units can be monitored directly by the factory supervisor,
while the measurement of employee turnover ratio will be monitored
continuously by the personnel manager of an organisation.
In 1990, Kaplan and Norton formulated the Balanced Scorecard (BS) through an
intensive research project. BS provides a system to measure and manage all
aspects of performance of a company, among others providing a balanced
measurement of the financial and non-financial performance. It translates the
organisationÊs mission and strategies to operating objectives and measurement of
performance through four perspectives:
(a) Financial
To see how far success is measured by shareholders.
(b) Customer Satisfaction
To see how we created value for customers.

(c) Internal Process

To see how we can make ourselves more prominent to satisfy customers
and shareholders.
(d) Learning and Development
To see the capacity of staff, information system and the environment of the
organisation required to continually improve internal processes and
customer relationships.
How is strategy related to measurements of performance from these four

perspectives? Let us imagine a strategy at a manufacturing company ă assume it
is executing a quality improvement strategy. If the design engineer receives
quality training (learning and development perspective), they can design a
product that minimises defective units (internal process perspective). If the
number of defective units is reduced, customers satisfaction will increase
(customer satisfaction perspective) and when customer satisfaction increases,
market share will increase and following that, increases profit (financial
perspective).
The following Table 8.5 shows the operating objectives to be achieved through
each of the perspectives above and the related performance measurement.
Table 8.5: Performance Measurement of Balanced Scorecard
Perspective Objective Measurement
Financial Return on expenses Income/total expenses

Return on investment Operating income/operating asset
Customer Retain existing customers % of return customers

% of business development from
existing customers
Internal Process Increase process efficiency Per unit cost movement

Output/input
Development Increase staff ability % of staff turnover

The four perspectives contain performance measurement in financial and non-

financial forms. Each measurement perspective or category that is to be
monitored has information from the past and standard measurement related to
the category. However, attention must be given to the suitability of each
measurement according to the type of business or organisation executing it.
ACTIVITY 8.3
How does the emphasis on the importance of intangible assets in
current organisations increase interest in the performance
measurement of BS (Balanced Scorecard)?
8.6 BENCHMARKING
Before we begin discussing this heading in detail, do you know the type of
information that can assist a firm in competing in terms of cost, quality and
services with other firms in the same industry?
Each firm in the business will face stiff competition among themselves until it
forces them to find a benchmark to compete in terms of cost, quality and services.
Benchmarking is a systematic appproach in identifying best practices in the
industry to assist the organisation in executing steps towards increasing
performance. In a globalised era, benchmarking can be done formally and
openly.
Six steps that must be taken to execute benchmarking are:

(a) Identifying what will undergo benchmarking;
(b) Plan benchmarking projects;
(c) Understand own performance;
(d) Research other parties;
(e) Learn the data obtained; and
(f) Take necessary actions.
Through benchmarking practice, it will assist organisations in dealing with the

problem of rejecting changes by staff. This is because the staff can see for
themselves what the organisation would like to achieve that can be achieved by
other organisations.

• Most organisations are structured into units that run operations and have
their own responsibilities.
Ć For the purpose of evaluating performance, the responsibility units are

divided into cost centre, revenue centre, profit centre and investment centre.
Ć Cost centres are usually evaluated with standard cost deviation analysis or
flexible budgets.
Ć The profit centre is evaluated by looking at the profit generated in the income
statement prepared.
Ć Segmented income statement provides information to evaluate profit and

performance of a segment which may be a branch, production line or sales
area of a company.
Ć To enable contribution margin from a segment to be presented effectively,

general fixed costs allocated is not deducted from the segmentÊs profit.
Ć The contribution margin income statement format is regarded as more

suitable for the purpose of preparing segmented income statement.
Ć An investment centre is usually evaluated by looking at returns generated by

the investment centre compared to the capital invested.
Ć The three measurements usually advanced are return on investment, residual

income and economic value added.
Ć Residual income is a measurement that can avoid this problem, though

residual income absolute figure derived from it cannot be used to compare
performance among different investment centres of different sizes.
Ć One weakness of measurement using this accounting figure, though, is its

tendency to encourage managers to adopt a myopic view.
Ć Another current performance measurement tool prepares a framework that

balances the use of measurements using accounting figures and other
information.
Ć The Balanced Scorecard (BS) is a tool designed to encourage the management

to focus its attention to current goals, when, if achieved, will assist in the long
term goals of the organisation.

Ć In evaluating performance, the organisation often would like to obtain

information about their competitors.
Ć Benchmarking make what is usually executed informally as a systematic

approach and can be executed openly.
Balanced scorecard Goal cogruence

Benchmarking Residual income
Common fixed cost Responsibility centre
Decentralised structure Return on investment
Economic value added Segment

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T op i c X Performance

same Jaya Jusco goals? Is there a possibility of the existence of competitiveness

8.1 RESPONSIBILITY ACCOUNTING

In general, a company can be arranged according to its responsibility. The

A responsibility centre is one part or segment in an organisation where the

In general, ther are four types of responsibility centres practised by an

Figure 8.1: Four types of responsibility centres

Copyright © Open University Malaysia (OUM)

To know further about each type of responsibility centres, please refer to

Table 8.1: Types of Responsibility Centres

Types of Responsibility Centres

Copyright © Open University Malaysia (OUM)

8.2 MEASURING COST OF QUALITY

The authority for decision-making is delegated to the lower levels. A very

Table 8.2: Advantages of Decentralised Structure

Advantages of Decentralised Structure

(c) Enables speedier feedback to customers when empowerment of decision-making is

(d) Decentralised structure gives opportunity to junior managers to gain experience in

(e) Giving or delegating responsibility to lower level managers will increase

Copyright © Open University Malaysia (OUM)

Even though the advantages of a decentralised system is very obvious, a few

Table 8.3: Disadvantages of Decentralised Structure

Disadvantages of Decentralised Structure

(d) In an extremely decentralised system, coordination among department and branch

The disadvantages outlined in Table 8.3 can be overcome if the companyÊs

Copyright © Open University Malaysia (OUM)

Goal congruence occurs when managers in a sub-unit in an organisation are

8.3 DECENTRALISED FIRMS AND SEGMENTED

To form an income statement according to segments, costs must be separated

For example, in a supermarket consisting of stationery and childrensÊ clothes

Copyright © Open University Malaysia (OUM)

managerÊs wage is still incurred because he continues to manage other

Income statement for a segment is usually prepared according to the contribution

Table 8.4 shows an example of segmented income statement of a supermarket.

Table 8.4: Example of a Segmented Income Statement

Total variable cost 75,000 40,000 115,000

Contribution margin 75,000 60,000 135,000

Direct fixed cost 45,000 40,000 85,000

Segment margin 30,000 20,000 50,000

General expenses 42,500

Net income RM7,500

Copyright © Open University Malaysia (OUM)

8.4 MEASURING THE PERFORMANCE OF

However, you will have to differentiate between performance evaluation of

However, there is a possibility that an efficient manager will be moved to a

Copyright © Open University Malaysia (OUM)

8.4.1 Return on Investment

Syarikat Cikucomel is a producer of local toys. The Southern Branch which

Operating income RM300,000

CikucomelÊs weighted average cost of investment is 9 percent, tax rate is 30

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From the above example, CikucomelÊs return on investment is 10 percent. You

Return on investment = Margin x Turnover

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The measurement of performance using the measurement of return of

Advantages of Return on Investment

(b) It encourages the manager to focus on cost efficiency.

(c) It encourages the manager to focus on operating asset efficiency.

However, extreme emphasis on return of investment figures can cause myopic

Return on investment = Margin x Turnover

Disadvantages of Return on Investment

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to a branch depends on the return on investment figure, would a rational