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20180731103923D5760 GNBCY PP Chap13 Performance Measurement in Decentralized Organizations With Cover Page
20180731103923D5760 GNBCY PP Chap13 Performance Measurement in Decentralized Organizations With Cover Page
20180731103923D5760 GNBCY PP Chap13 Performance Measurement in Decentralized Organizations With Cover Page
Performance Measurement in
Decentralized Organizations
Chapter 13
Cost, profit,
and investment
centers are all
known as Responsibility
Center
responsibility
centers.
© 2015 McGraw-Hill Education Garrison, Noreen, Brewer, Cheng & Yuen 5
Cost Center
Revenues
A segment whose
Sales
manager has control
Interest
over both costs and
Other
revenues,
Costs
but no control over
investment funds. Mfg. costs
Commissions
Salaries
Other
A segment whose
manager has control
over costs, revenues,
and investments in
operating assets.
Huge
Cold Store M art Place Buy n Save
$65,000,00
$85,000,000 $40,000,000 $90,000,000
0
No computer No computer
division means . . . division manager.
Time
© 2015 McGraw-Hill Education Garrison, Noreen, Brewer, Cheng & Yuen 20
Traceable and Common Costs
Traceable Common
Pipe Products
9-inch 12-inch 18-inch Total
Warehouse sq. ft. 1,000 4,000 5,000 10,000
Lease price per sq. ft. $ 4 $ 4 $ 4 $ 4
Total lease cost $ 4,000 $ 16,000 $ 20,000 $ 40,000
W ebber, Inc.
Income Statement
Company Television Computer
Sales $ 500,000 $ 300,000 $ 200,000
Variable costs 230,000 150,000 80,000
CM 270,000 150,000 120,000
Traceable FC 170,000 90,000 80,000
Division margin 100,000 $ 60,000 $ 40,000
Common costs
Net operating
income
Income Statement
Company Television Computer
Sales $ 500,000 $ 300,000 $ 200,000
Variable costs 230,000 150,000 80,000
CM 270,000 150,000 120,000
Traceable FC 170,000 90,000 80,000
Division margin 100,000 $ 60,000 $ 40,000
Common costs 25,000
Common costs should not
Net operating
be allocated to the
income $ 75,000
divisions. These costs
would remain even if one
of the divisions were
eliminated.
© 2015 McGraw-Hill Education Garrison, Noreen, Brewer, Cheng & Yuen 27
Traceable Costs Can Become
Common Costs
Product
Lines
© 2015 McGraw-Hill Education Garrison, Noreen, Brewer, Cheng & Yuen 29
Traceable Costs Can Become
Common Costs
Income Statement
Television
Division Regular Big Screen
Sales $ 200,000 $ 100,000
Variable costs 95,000 55,000
CM 105,000 45,000
Traceable FC 45,000 35,000
Product line margin $ 60,000 $ 10,000
Common costs
Divisional margin
Product Customer
R&D Design Manufacturing Marketing Distribution Service
Failure to trace
costs directly Inappropriate
allocation base
Hoagland's
Lakeshore Bar Restaurant
Sales $ 800,000 $ 100,000 $ 700,000
Variable costs 310,000 60,000 250,000
CM 490,000 40,000 450,000
Traceable FC 246,000 26,000 220,000
Segment margin 244,000 $ 14,000 $ 230,000
Common costs 200,000
Profit $ 44,000
Hoagland's
Lakeshore Bar Restaurant
Sales $ 800,000 $ 100,000 $ 700,000
Variable costs 310,000 60,000 250,000
CM 490,000 40,000 450,000
Traceable FC 246,000 26,000 220,000
Segment margin 244,000 14,000 230,000
Common costs 200,000 20,000 180,000
Profit $ 44,000 $ (6,000) $ 50,000
Hoagland's
Lakeshore Bar Restaurant
Sales $ 700,000 $ 700,000
Variable costs 250,000 250,000
CM 450,000 450,000
Traceable FC 220,000 220,000
Segment margin 230,000 230,000
Common costs 200,000 200,000
Profit $ 30,000 $ 30,000
© 2015 McGraw-Hill Education Garrison, Noreen, Brewer, Cheng & Yuen 44
Learning Objective 2
Acquisition cost
Less: Accumulated depreciation
Net book value
( )
Net Average Minimum
Residual
= operating - operating required rate of
income
income assets return
The residual
income approach
has one major
disadvantage.
It cannot be used
to compare the
performance of
divisions of
different sizes.
Retail Wholesale
Operating assets $ 100,000 $ 1,000,000
Required rate of return × 20% 20%
Minimum required return $ 20,000 $ 200,000
Retail Wholesale
Actual income $ 30,000 $ 220,000
Minimum required return (20,000) (200,000)
Residual income $ 10,000 $ 20,000
Retail Wholesale
Actual income $ 30,000 $ 220,000
Minimum required return (20,000) (200,000)
Residual income $ 10,000 $ 20,000
Throughput Time
Throughput Time
Financial Customers
Performance
measures
Internal Learning
business and growth
processes
Internal
Business Number of Time to
options available install option
Processes
Customer satisfaction
with options Satisfaction
Increases
Number of Time to
options available install option
Employee skills in
installing options
© 2015 McGraw-Hill Education Garrison, Noreen, Brewer, Cheng & Yuen 92
The Balanced Scorecard ─ Jaguar Example
Profit
Results
Contribution per car Contribution
Increases
Customer satisfaction
with options Satisfaction
Increases
Number of Time to
options available install option Time
Decreases
Employee skills in
installing options
© 2015 McGraw-Hill Education Garrison, Noreen, Brewer, Cheng & Yuen 93
The Balanced Scorecard ─ Jaguar Example
Results
Profit Profits
Increase
If number
Contribution per car Contribution
of cars sold Increases
and contribution
Cars Sold
per car increase, Number of cars sold
Increases
profits
increase. Customer satisfaction
with options
Number of Time to
options available install option
Employee skills in
installing options
© 2015 McGraw-Hill Education Garrison, Noreen, Brewer, Cheng & Yuen 94
Key Performance Indicators for a Balanced
Scorecard
Key performance indicators (KPIs) should address
• Missions and Vision of the organization
• Management principles and objectives (i.e. Execution of
strategy)
• Critical success factors of the organization and operations
• Key objectives of the subsidiary/division/department/employee
• Balance of lead and lag measures (i.e. measures that lead to
future success and measures that reflect historical
performance)
Employee Satisfaction **
Customer Satisfaction **
Innovative Products **
Management
Principles
Profitable Growth
Focus on delivery of quality
products to valued customers
Responsibilities to Society
Quality
Critical
Factors
Response Time
Cost
Division’s
Objective
Sales Growth **
Appendix 13A
© 2015 McGraw-Hill Education Garrison, Noreen, Brewer, Cheng & Yuen 100
Learning Objective 6
© 2015 McGraw-Hill Education Garrison, Noreen, Brewer, Cheng & Yuen 101
Negotiated Transfer Prices
© 2015 McGraw-Hill Education Garrison, Noreen, Brewer, Cheng & Yuen 102
Grocery Storehouse – An Example
© 2015 McGraw-Hill Education Garrison, Noreen, Brewer, Cheng & Yuen 103
Grocery Storehouse – An Example
The selling division’s (West Coast Plantations) lowest acceptable transfer
price is calculated as:
Variable cost Total contribution margin on lost sales
Transfer Price +
per unit Number of units transferred
© 2015 McGraw-Hill Education Garrison, Noreen, Brewer, Cheng & Yuen 104
Grocery Storehouse – An Example
If West Coast Plantations has sufficient idle capacity (3,000 crates) to
satisfy Grocery Mart’s demands (1,000 crates), without sacrificing
sales to other customers, then the lowest and highest possible
transfer prices are computed as follows:
Selling division’s lowest possible transfer price:
$ -
Transfer Price $10 + = $ 10
1,000
Buying division’s highest possible transfer price:
Transfer Price Cost of buying from outside supplier = $ 20
© 2015 McGraw-Hill Education Garrison, Noreen, Brewer, Cheng & Yuen 108
Transfers at the Cost to the Selling Division
© 2015 McGraw-Hill Education Garrison, Noreen, Brewer, Cheng & Yuen 109
Transfers at Market Price
© 2015 McGraw-Hill Education Garrison, Noreen, Brewer, Cheng & Yuen 110
Divisional Autonomy and Suboptimization
The principles of
decentralization suggest
that companies should
grant managers autonomy
to set transfer prices and
to decide whether to sell
internally or externally,
even if this may
occasionally result in
suboptimal decisions.
This way top management
allows subordinates to
control their own destiny.
© 2015 McGraw-Hill Education Garrison, Noreen, Brewer, Cheng & Yuen 111
End of Chapter 13
© 2015 McGraw-Hill Education Garrison, Noreen, Brewer, Cheng & Yuen 112