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b16 MC Dezentralized Org
b16 MC Dezentralized Org
b16 MC Dezentralized Org
Management Control In
Decentralized
Organizations
©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton 10 - 1
Learning Objective 1
©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton 10 - 2
Decentralization
©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton 10 - 3
Centralization versus
Decentralization
Centralization Decentralization
©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton 10 - 4
Costs and Benefits
Benefits of decentralization:
Lower-level managers have the best
information concerning local conditions.
It promotes management skills which,
in turn, helps ensure leadership continuity.
Managers enjoy higher status from being
independent and thus are better motivated.
©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton 10 - 5
Costs and Benefits
Costs of decentralization:
Managers may make decisions that are not
in the organization’s best interests.
Managers also tend to duplicate services
that might be less expensive if centralized.
Costs of accumulating and processing
information frequently rise.
©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton 10 - 6
Costs and Benefits
©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton 10 - 7
Middle Ground
Cost-benefit considerations usually require
that some management decisions be highly
decentralized and others centralized.
Decentralization is most successful when an
organization’s segments are relatively
independent of one another.
©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton 10 - 8
Segment Autonomy
©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton 10 - 9
Learning Objective 2
©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton 10 - 10
Profit Centers and
Decentralization
Accountability for
Profit centers
revenue and expenses
Freedom to make
Decentralization
decisions
©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton 10 - 12
Learning Objective 3
©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton 10 - 13
Transfer Prices
Transfer prices are the amounts charged by
one segment of an organization for a
product or service that it supplies to another
segment of the same organization.
©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton 10 - 14
Purpose of Transfer Pricing
©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton 10 - 15
Purpose of Transfer Pricing
©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton 10 - 16
Learning Objective 4
©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton 10 - 18
Transfers at Cost
©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton 10 - 19
Market-Based Transfer Prices
©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton 10 - 20
Market-Based Transfer Prices
The major drawback to market-based prices
is that market prices are not always
available for items transferred internally.
©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton 10 - 21
Variable-Cost Pricing
When market prices cannot be used,
versions of “cost-plus-a-profit” are often
used as a fair substitute.
©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton 10 - 22
Variable-Cost Pricing
©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton 10 - 23
Negotiated Transfer Prices
Companies heavily
committed to segment
autonomy often allow
managers to negotiate
transfer prices.
©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton 10 - 24
Dysfunctional Behavior
©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton 10 - 25
The Need for Many Transfer
Prices
The “correct” transfer price depends on the
economic and legal circumstances and the
decision at hand.
Organizations may have to make trade-offs
between pricing for congruence and pricing
to spur managerial effort.
©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton 10 - 26
Learning Objective 5
©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton 10 - 27
Multinational Transfer Pricing
Example
An item is produced by Division A in a
country with a 25% income tax rate.
It is transferred to Division B in a country
with a 50% income tax rate.
An import duty equal to 20% of the price of
the item is assessed.
Full unit cost is $100, and variable cost is
$60 (either transfer price could be chosen).
©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton 10 - 28
Multinational Transfer Pricing
Example
$100 Why?
©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton 10 - 29
Multinational Transfer Pricing
Example
©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton 10 - 30
Learning Objective 6
©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton 10 - 31
Link Rewards to Results
Choices
ChoicesofofResponsibility
Responsibility
Motivational
MotivationalCriteria
Criteria Centers
Centersand
andIncentives
Incentives
Goal
Goal Managerial
Managerial Performance
Performance Rewards
Rewards
Congruence
Congruence Effort
Effort Measures
Measures
Feedback
Feedback
©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton 10 - 32
Link Rewards to Results
Research shows that the more objective the
measures of performance, the more likely
the manager will provide effort.
Thus accounting measures, which provide
relatively objective evaluations of
performance, are important.
©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton 10 - 33
Agency Theory
Economists describe the formal
choices of performance measures
and rewards as agency theory.
Employment contracts will
trade off three factors:
1 – Cost of measuring performance
2 – Incentive 3 – Risk
©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton 10 - 34
Learning Objective 7
©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton 10 - 36
Return on Investment
Income Revenue
ROI = Revenue × Investment
©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton 10 - 37
Return on Investment
©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton 10 - 38
Residual Income
©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton 10 - 39
Economic Value Added
©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton 10 - 40
Learning Objective 8
©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton 10 - 42
Invested Capital
©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton 10 - 43
Asset Allocation to Divisions
Commonly used bases for allocation, when
assets are not directly identifiable with a
specific division, include:
Asset Class Possible Allocation Base
Corporate cash Budgeted cash needs
Receivables Sales weighted by terms
Inventories Budgeted sales or usage
Plant and equipment Usage of services
©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton 10 - 44
Valuation of Assets
©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton 10 - 45
Learning Objective 9
©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton 10 - 46
Keys to Successful
Management Control Systems
©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton 10 - 47
Focus on Controllability
A distinction should be made between the
performance of the division manager and
the performance of the division as an
investment by the corporation.
Managers should be evaluated on the basis
of their controllable performance.
©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton 10 - 48
Management by Objectives
©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton 10 - 49
Tailoring Budgets for Managers
Many of the troublesome motivational
effects of performance evaluation systems
can be minimized by the astute use of
budgets.
The desirability of tailoring a budget to
particular managers cannot be
overemphasized.
©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton 10 - 50
End of Chapter 10
©2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton 10 - 51