lecture - decentralization and responsibility acctg

7/30/2019 Lecture - Decentralization and Responsibility Acctg

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DECENTRALIZATION &

RESPONSIBILITY

ACCOUNTING


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General Forms of Management

Centralization (centralized)Form of organization where the firm requirestop management to make most decisions andcontrol most activities of the organizational

units, usually from the orgs central office.

Decentralization (decentralized)

Form of organization where the firm isdivided into divisions, departments, units,sub-units. The responsible officer possesses acertain degree of autonomy, independence in

operations and decision-making functions.


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Training

MotivatedManagers

People assigned in sub-unitsare specialists

Enhancedspecialization

Allowing people certain autonomyin decision-making prepares themfor future higher responsibilities

People with certain decision-making functions have greater

motivation than those who merely

execute decisions of others

Benefits of

Decentralization


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Defined Span ofControl

FasterDecision-making

Provides time relief to upper-levelmanagers, enabling them todevote more time to strategic

planning

Delegating decision-makingenables the organization to

respond in a timely manner toopportunities, as well as to

problems, as they arise.

Benefits of

Decentralization..


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Measurementsystem

Sub-optimization

Without which, best policies breakdown, control is rendered

ineffective and lack of controlreduces efficiency.

Need forcompetent people

Measurement system should beapplicable to all divisions; shouldprovide consistency in reportingperiod and method of reporting,

and in data gatheringDivision managers may work for

their own interests without

consideration of the benefits tothe entire or anization.

Disadvantages of

Decentralization


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CONTROL MECHANISM

Sometimes, sub-units act in ways that

are not consistent with the goals of thetotal organization;

Control mechanism must be provided toensure that the sub-units do not totallyact unfavorably against the goals of theorganization, through performanceevaluation of the responsible officers

concerned.

This control mechanism isResponsibility Accounting


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RESPONSIBILITY ACCTG

OBJECTIVE

It assists organizational unitmanagers in conducting basic controlfunctions:

A budget is prepared and used toofficially communicate expectedresults and delegate authority toimplement;

Operating reports, based onflexible budget, are compared withactual results; budgetary balances areperiodically prepared and reported

for review by top management


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OBJECTIVE..

Awareness of significant variancesby unit managers can promptthem to immediately correctproblems before such reports are

presented to higher level ofmanagement for appropriateaction.

Foregoing considered, reportssubmitted to top management

will, as a result, will already showresolution of problems and /or

explanation why problems werenot or could not be resolved.


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Advantages

It facilitates delegation ofdecision-making;

It helps promote the concept ofManagement by Objective (MBO)

wherein managers agree on acommon set of goals and theirperformance evaluated on thebasis of their attainment of goals;


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Advantages..

It complements establishment ofstandards of performance upon

which the efficiency andeffectiveness of the sub-units areevaluated;

It permits effective use of

management by exception,which encourages unit managersto focus on operational factors

which are significant deviationfrom plans.


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BASIC CONDITIONS FOR AN

EFFECTIVE SYSTEM

Well definedstandards ofperformance

Areas of jurisdiction must clearlybe established and understood, as

well as the financial responsibilities

Well definedorganizational

structure

Integrated plan for control ofoperations as well as the

procedures to effectuate the plan.


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EFFECTIVE SYSTEM.....

A system that records, measuresand classifies actions in order toproduce performance reports; a

system that can identify revenues,

expenses and assets to specificunits in the organization.

Accountingsystem


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EFFECTIVE SYSTEM.....

Feedbacksystem

A system that provides regularreports showing the planned

results, actual results andhighlighting deviations from theplan. (To include only items that

affect performance of the sub-unit, controllable by the manageror direct costs of the segment)


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PEFORMANCE REPORTS

An effective responsibility accounting system

requires the determination of the range ofauthority, influence and control the manager has

over revenues, costs and investment.

Responsibility CenterA unit within the organization which has control

over costs, revenues and/or investment funds.


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RESPONSIBILITY CENTER

(Types)

Responsibility center wherein the

manager has authority only toincur costs.

Cost Center

Cost center, as well as themanager, is evaluated through the

variance analysis reports



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(Types..)

Profit/revenuecenter

Responsibility center wherein themanager is accountable only forthe generation of revenues (no

control over selling prices or

budgeting costs)Profit center is measured by usingthe contribution approach to costallocation; or, the determination

of the profit centers contributionto the recovery of indirect cost of

the company; or, budgetedrevenues and costs using flexible

budget

S O S C


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(Types.....)

Investmentcenter

Responsibility center wherein themanager is responsible forgeneration of revenues and

planning and controlling expenses

and has authority to acquire,utilize, and to dispose assets

Performance of investment centeris measured through

determination of its Return onInvestment (ROI) and Residual

Income (RI).

P f E l i


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Performance Evaluation

Non-controllable

costs

Costs that may be influenced by

unit managers in a given timeperiod.

Controllablecosts

Costs assigned only to the

responsibility center by topmanagement , not under the

control of the unit manager, i.e.rental assigned to production

department.

Cost and Profit Centers

a) Responsible Officer


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Performance Evaluation.....

Indirect costs

Costs directly incurred by the

center. These can be avoided by theelimination of the center.

Direct costs

Costs assigned or allocated only to

the center as its share in the totalcosts incurred by the entire

organization. These costs areunavoidable. It can not be avoided

by the elimination of the center.

Cost and Profit Centers

b.1) Responsibility center


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Negative directcontribution

margin

This indicates that thecenter/segment is performing

favorably.

Positive directcontribution

margin

This indicates that thecenter/segment is rathercontributing a loss to the

organization.

Cost and Profit Centersb.2 Responsibility Center - Measure of performance)


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A. Return on

Investment(ROI)

Most common investment center

performance measureROI = Segment Net IncomeInvested Capital

For Investment CenterMeasures for profit and cost centersare applicable, plus followingadditional measures:


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Alternative ROI

formula (DuPontmodel)

ROI = Income x Sales RevenueSales Revenue Invested Cap.

For Investment CenterMeasures for profit and cost centers areapplicable, plus following additionalmeasures:


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Basic Terms

in Performance Evaluation.....

B. ResidualIncome (RI)

Another performance measure

Centers actual income PxxxLess: Imputed centers income:

(Invested cap, initial or average,x Imputed interest rate xxx

Residual income Pxxx

For Investment CenterMeasures for profit and cost centers are

applicable, plus following additionalmeasures:

lecture - decentralization and responsibility acctg

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