Professional Documents
Culture Documents
CHPT 12 HO
CHPT 12 HO
Decentralization
UAA ACCT 202
Principles of Managerial
Accounting
Dr. Fred
Barbee
Evaluating
Evaluating
Decision
Decision
Making
Making
Controlling
Controlling
Organizing
Organizing
&
& Directing
Directing
Controlling Operations
Management by exception
Responsibility Accounting
Delegation of authority
Management by walking
around
Responsibility Accounting
. . . is a reporting system in which
V ic e P r e s id e n t
P r o d u c t io n
V ic e P r e s id e n t
C o n t r o lle r
Installing Responsibility
Accounting
Create a set of financial
performance.
Evaluate based on comparison
Responsibility Accounting
Evaluation of responsibility centers
depends on . . .
The extent of delegation of authority;
and
A managers preference
Decentralization . . .
. . . the delegation of authority to
Centralization . . .
. . . A centralized organization is
Decentralization
The more decentralized the firm,
Advantages of
Decentralization
Top level managers are relieved of
Disadvantages of
Decentralization
Upper level management loses
some control.
Lack of goal congruence.
Duplication of effort.
A segment is any
part or activity of
an organization
about which a
manager seeks
cost, revenue, or
profit data. A
segment can be
A Sales Territory
A Service Center
Cost
Cost
Center
Center
Profit
Profit
Center
Center
Investment
Investment
Center
Center
Responsibility
Responsibility Centers:
Centers: AA Systems
Systems Perspective
Perspective
Data
(Inputs)
Resources used . . .
DM
DM
DL
DL
MOH
MOH
Processing
Processing Steps
Steps
Within
Within
Information
Information Systems
Systems
Capital . . .
Working
Working
Capital
Capital
Equipment
Equipment
Etc.
Etc.
Information
(Outputs)
Output . . .
Goods,
Goods,
Services,
Services,
Ideas
Ideas
Responsibility
Responsibility Centers:
Centers:
A
A Systems
Systems Perspective
Perspective
Input
Input
Process
Process
Output
Output
Cost Center
Control only
this
Evaluation . . .
A cost center is evaluated by
Responsibility
Responsibility Centers:
Centers:
A
A Systems
Systems Perspective
Perspective
Input
Input
Process
Process
Profit Center
Control these
Output
Output
Revenues
Sales
Interest
Other
Costs
Mfg. costs
Commissions
Salaries
Other
A Profit Center . . .
A profit center is evaluated by
Corporate Headquarters
Responsibility
Responsibility Centers:
Centers:
A
A Systems
Systems Perspective
Perspective
Input
Input
Process
Process
Output
Output
Investment Center
Control these
Investment Center
An investment center is evaluated
Levels of Segmented
Statements
Levels of Segmented
Statements
Levels of Segmented
Statements
C o m p u te r D iv is io n
T e le v is io n D iv is io n
Lets
Lets look
look more
more closely
closely at
at the
the Television
Television
Divisions
Divisions income
income statement.
statement.
Cost
Cost of
of goods
goods
sold
sold consists
consists of
of
variable
variable
manufacturing
manufacturing
costs.
costs.
Fixed
Fixed and
and
variable
variable costs
costs
are
are listed
listed in
in
separate
separate
sections.
sections.
Segment
Segment margin
margin
is
is Televisions
Televisions
contribution
contribution
to
to profits.
profits.
Dont allocate
common costs.
Traceable
Common
No computer
division manager.
We still have a
company president.
Levels of Segmented
Statements
Income Statement
Sales
Variable costs
CM
Traceable FC
Division margin
Common costs
Net operating
income
Company
$ 500,000
230,000
270,000
170,000
100,000
25,000
$
Television
$ 300,000
150,000
150,000
90,000
$ 60,000
Computer
$ 200,000
80,000
120,000
80,000
$ 40,000
Common
Common costs
costs should
should not
not
be
allocated
to
the
be
allocated
to
the
75,000
divisions.
divisions. These
These costs
costs
would
would remain
remain even
even ifif one
one
of
of the
the divisions
divisions were
were
eliminated.
eliminated.
Product
Lines
T e le v is io n
D iv is io n
R e g u la r
U .S . S a le s
B ig S c r e e n
F o r e ig n S a le s
U .S . S a le s
Sales
Territories
F o r e ig n S a le s
Big Screen
$ 100,000
55,000
45,000
35,000
$ 10,000
Fixed
Fixed costs
costs directly
directly traced
traced
to
to the
the Television
Television Division
Division
$80,000
$80,000 ++ $10,000
$10,000 == $90,000
$90,000
Big Screen
$ 100,000
55,000
45,000
35,000
$ 10,000
Big Screen
$ 100,000
55,000
45,000
35,000
$ 10,000
Segment Margin
Profits
Time
Responsibility and
Controllability
Controllability is . . .
The degree of influence that a
Controllability
Few costs are
clearly under
the sole
influence of one
manager.
Controllability
With a long
enough time
span, all costs
will come
under
someones
control.
Costs
Costs
Uncontrollable
Uncontrollable
Environmental
Environmental
Effects
Effects
Managers
Managers only
only
partially
partially control
control
costs.
costs.
Management
Management
Actions
Actions
Costs
Costs
Uncontrollable
Uncontrollable
Environmental
Environmental
Effects
Effects
Performance
Performance
Measures
Measures
Rewards
Rewards
Performance
Performancemeasurement
measurement
systems
systemsthat
thatare
arebased
based on
on
controllable
controllable costs
costs .. .. ..
Costs
Costs
Performance
Performance
Measures
Measures
Rewards
Rewards
Costs
Costs
Uncontrollable
Uncontrollable
Environmental
Environmental
Effects
Effects
Performance
Performance
Measures
Measures
Rewards
Rewards
When
When performance
performancemeasures
measures
are
areaffected
affectedby
byuncontrollable
uncontrollable
environmental
environmentaleffects
effects.... ..
Costs
Costs
Uncontrollable
Uncontrollable
Environmental
Environmental
Effects
Effects
Performance
Performance
Measures
Measures
Rewards
Rewards
.... ..management
management may
maytry
tryto
to control
control
the
theperformance
performancemeasure
measurerather
ratherthan
than
the
theunderlying
underlyingcost.
cost.
Assignment of costs
to segments that are
really common costs of
the entire organization.
Omission of Costs
Costs assigned to a segment should include
all costs attributable to that segment from
the companys entire value chain.
chain
Business Functions
Making Up The
Value Chain
R&D
Product
Design
Customer
Manufacturing Marketing Distribution Service
Inappropriate Methods of
Allocating Costs Among
Segments
Arbitrarily dividing
common costs
among segments
Inappropriate
allocation base
Failure to trace
costs directly
Segment
1
Segment
2
Segment
3
Segment
4
Return on Investment
The ROI formula is expressed as:
Return on Investment
Where . . .
Income
Margin = -------------------Sales
Return on Investment
Where . . .
Sales
Turnover = -----------------------------Invested Capital
Return on Investment
Income
------------------------------
Sales
The ratio of
operating
income to sales
Sales
------------------------------
Invested Capital
The efficiency
of asset
utilization.
Return on Investment
Income
-----------------------------Sales
The ratio of
operating
income to sales
Sales
-----------------------------Invested Capital
The efficiency
of asset
utilization.
Return on Investment
Income
-----------------------------Invested Capital
ROI
Sales
Cost of
Goods Sold
Sales - OE
Selling
Expense
Operating
Expenses
Admin.
Expense
Net Oper.
Income
NOI / Sales
Margin
Sales
Sales
Current
Assets
Inventory
CA + NCA
PP&E
Other
Assets
Noncurr.
Assets
Sales / AOA
Ave Oper
Assets
Turnover
Sales
Cost of
Goods Sold
Sales - OE
Selling
Expense
Operating
Expenses
Admin.
Expense
Net Oper.
Income
NOI / Sales
Margin
Sales
MxT
Cash
Accounts
Receivable
Sales
Current
Assets
Inventory
CA + NCA
PP&E
Other
Assets
Noncurr.
Assets
Sales / AOA
Ave Oper
Assets
Turnover
ROI
Income
-----------------------------Sales
Sales
-----------------------------Invested Capital
Measuring Income
Variety of possibilities
Text uses EBIT (Net Operating
Income)
Earnings Before Interest and
Taxes
Measuring Invested
Capital
Variety of possibilities
Text uses Net Book Value
Consistent with how PP&E is listed on
the Balance Sheet.
Consistent with the computation of
operating income.
Reduce
Expenses
Reduce
Assets
XYZ Company
Income (EBIT)
$30,000
Sales
$500,000
Invested Capital
$200,000
Return on Investment
$30,000
-------------$500,000
$500,000
-------------$200,000
6%
2.5
15%
Approach #1:
Increase Sales
Increase Sales . . .
Assume that XYZ is able to increase
sales to $600,000.
Net Operating Income increases to
$42,000.
Average Operating Assets remain
unchanged.
What is the impact on ROI?
Return on Investment
$42,000
-------------$600,000
$600,000
-------------$200,000
7%
3.0
21%
Reduce Expenses . . .
Assume that XYZ is able to reduce
expenses by $10,000
Net Operating Income increases to
$40,000.
Average Operating Assets and sales
remain unchanged.
What is the impact on ROI?
Return on Investment
$40,000
-------------$500,000
$500,000
-------------$200,000
8%
2.5
20%
Reduce Assets . . .
Assume that XYZ is able to
Return on Investment
$30,000
-------------$500,000
6%
x
x
24%
$500,000
-------------$125,000
2.4
Advantages of ROI . . .
It encourages managers to focus
on cost efficiency.
It encourages managers to focus
Disadvantages of ROI
It can produce a narrow focus on
Overinvestment
Evaluation in terms of profit can
lead to overinvestment.
Overinvestment
Increases in
Assets
Manager
Compan
y
Increases in
Profits
Underinvestment
Evaluation in terms of ROI can
lead to underinvestment.
Overinvestment
Decreases in
Assets
Manager
Compan
y
Increases in
ROI
Criticisms of ROI . . .
ROI tends to emphasize short-run
Multiple Criteria . . .
Growth in market share
Increases in productivity
Dollar profits
Receivables turnover
Inventory turnover
Product innovation
Residual Income . . .
. . . is the net operating income
Division B
$1,000,000
$3,000,000
200,000
450,000
*Min. Required R of R
120,000
360,000
Residual Income
$80,000
$90,000
Invested Capital
Problem with RI . . .
RI cannot be used to compare
performance of divisions of
different sizes.
Advantage of RI . . .
RI encourages managers to make
Example . . .
Assume that ABC Companys
Marsh Company
Return on Investment
Present
New
Overall
$1,000,000
$250,000
$1,250,000
NOPAT (2)
200,000
*40,000
240,000
ROI (1)/(2)
20%
16%
19.2%
Marsh Company
Return on Investment
New
Overall
$1,000,000
$250,000
$1,250,000
NOPAT (2)
200,000
*40,000
240,000
ROI (1)/(2)
20%
16%
19.2%
Marsh Company
Residual Income
New
Overall
$1,000,000
$250,000
$1,250,000
200,000
40,000
240,000
$120,000
$30,000
$150,000
$80,000
$10,000
$90,000
Calculating EVA . . .
EVA = After-tax operating income