College of Business and Economics

Department of Accounting and Finance

Advanced Cost accounting assignment

Group members: ID.No

1.Mesfin H/Michael GS/Ex-oo37/14
2.Fiseha Tadesse Gs/ Ex-0031/14
3.Tariku Bedada G/sEx- 0574/14

Submitted To:Dr .D.Guruswamy

Submission Date: july-22-2023
We selected ADM School and we tried to answer the following questions given.

1. Evaluate which factors determine a firm should be decentralized?

2. How are decentralization and responsibility accounting related?
3. Does the financial report break down the results into major segments? Can you determine
the financial contribution (i.e.,
revenue less expenses of each segment from the report?
4. Does the report follow the principles for segment
reporting? If not, what principles are violated and what harm, if
any, can occur as a result from violating those principles?

Answers

1. Factors that determine the decentralization of firms are listed below

I. Size of Organization and its Complexity

If the organization is large and complex, then it has a greater need for decentralization. However,
if the organization is relatively simpler and smaller, then creating autonomous units is usually
costly. Therefore, the top management makes most of the decisions.

II. Are the operations dispersed?

Let’s say that an organization has its production and sales units geographically scattered
across multiple locations. In such cases, keeping centralized control over all the processes is very
difficult.

Therefore, such organizations tend to opt for decentralization. On the other hand, if an
organization has all the units present within the same building, then having centralized
control is more effective.

III. Degree of Diversification

In the case of companies having multiple diverse product lines, decentralization is necessary
as well as beneficial. On the other hand, if the organization desires high standards of
standardization, then it needs centralization.
 IV. How many competent personnel does the organization have?

An organization can successfully decentralize authority only if it has competent and

experienced managers at lower levels. If there is a dearth of such employees in the
organization, then decentralization will function in a restricted manner.

V. Top Management’s Outlook

If the top management is conservative and believes in control in the hands of a limited
number of people, then it is likely to centralize authority.

On the other hand, if it believes in individual freedom and is comfortable with the
authority not being confined to a limited few, then the organization will have a high
degree of centralization.

VI. Nature of Functions

Usually, some basic functions in an organization like sales, production, etc. have a higher
degree of decentralization.

In comparison, staff functions like personnel, research and development, finance, etc. are
less decentralized or even majorly centralized.

VII. Communication System in the Organization

If an organization decides to decentralize authority, then it must ensure that an effective

communication system exists. This is necessary for coordinating and controlling the
activities of the operational units.

On the other hand, if an organization has an ineffective communications system, then it

should opt for centralization.

Further, computerized management information systems have enabled centralized

decision-making.

VIII. Planning and Control Procedures in the Organization

If an organization is clear about its objectives and policies, then seniors are more willing
to allow their subordinates to make independent decisions.

Remember, decentralization is successful only when there is a good control system in the
organization.

This is because the top management can use this system to assess the effectiveness of the
decisions that the subordinates make.
IX. Environmental Factors

The environmental factors play a major role in determining the degree of decentralization
in an organization.

To give an example, if the business environment of an organization is highly uncertain,

the organization might not give a high degree of freedom to operating units.

This is because, in uncertain conditions, this might endanger the existence of the
organization itself.

2. How are decentralization and responsibility accounting related?

The key to effective decision making in a decentralized business is responsibility
accounting. Responsibility accounting is the process of assigning authority and
responsibility to managers of sub-units and then measuring and evaluating their
performance against targets set, by identifying any variance between actual and planned
performance. Under responsibility accounting, managers are only held responsible for
things under their control. To enhance the use of responsibility accounting for decision
making, responsibility centers are established within organizations. Responsibility centers
are sub-units (be it departments, divisions, segments, etc.) in which managers are
responsible and accountable for specific types of operating activities. Organizations
typically identify the different segments or levels of responsibility, as cost, revenue,
profit, or investment centers and attach different levels of responsibility to each segment.
These four common types of responsibility centers are summarized in the diagram below

Responsibility centers
To answer question number 3 and 4 we attached the selected firm recent year
financial statement prepared for internal reporting.
3. Does the financial report break down the results into major segments? Can you
determine the financial contribution (i.e., revenue less expenses of each segment from the
report?

The firm financial report of the firm does not break down the result into major segments.