"Chapter 10 � Decentralization and Performance Measurement"
ACCT202 Chapter 12 Lecture Notes Page 1 of 3 Chapter 12 – Decentralization and Performance Measurement Some things we know: We know Ownership, Organizational, and Management Structures Ownership Structures: Sole-Proprietorship Partnership Corporation Organization Structure Single Entity Multi Entity Divisions Management Structures Centralized – decision making rest at the top Decentralized – decision-making authority is dispersed throughout the organization Advantages Better information, leading to better decisions ???? Faster response to changing circumstances ???? Increased motivation to managers Excellent training for top level managers ???? Disadvantages Costly duplication of activities Lack of goal congruence ACCT202 Chapter 12 Lecture Notes Page 2 of 3 Responsibility Accounting – “a technique that hold managers responsible only for the costs and revenues that they can control”. (Jiambalvo, page 363) DeGeorge believes that you can not delegate responsibility. Rather, the Board of Directors and senior management delegate authority, and hold managers accountable for the areas over which they have authority. Responsibility (Accountability) Centers Cost Center – manager has authority over costs only Performance is measured using budget variances Revenue Center – manager has authority over revenue only Performance is measured by variance to sales forecast/budget Profit Center – manager has authority over revenues and costs (but does not have the authority to make decisions relating to investment of the company’s assets. Performance is measured based on bottom line (net income) Investment Center – a profit center that has the authority to invest the company’s assets. Performance is measured by Return on Investment (ROI) ACCT202 Chapter 12 Lecture Notes Page 3 of 3 Tools used to Measure the Performance of Investment Centers IC’s vary in size (dollar value of assets employed or sales). These tools allow management to compare the operating efficiency of various IC’s. Return on Investment = Net Operating Income generated by an investment center Operating assets employed by the Investment Center ROI is presented as a percentage ROI measures how efficiently the IC utilized the company’s assets. Profit Margin = Net Income Net Sales Profit Margin is presented as a percentage Profit Margin measures efficiency of costs compared to revenues Asset Turnover = Net Sales Operating assets employed by the Investment Center Asset Turnover is presented as a number. Ex.: We turned over our assets 3 times during the year. Asset Turnover measures the level of activity of an IC Accordingly, ROI is also equal to Profit Margin X Asset Turnover NOTE: The author uses the term NOPAT (Net Operating Profit After Taxes) for computing ROI. NOPAT is equal to the Net Income adjusted for the affect of interest expense net of the corresponding income taxes. In addition the author does not include the amount of interest bearing debt in the denominator. The author is correct in excluding these items, as debt and corresponding interest expense are financing activities, and ROI is aimed at measuring operating performance. In practice, most IC’s and virtually all operating segments are measured based on net income and net assets employed. Residual Income = Net Income in excess of a targeted/desired/required ROI. Economic Value Added (EVA) a measurement tool/concept whose time has either not yet come or has already come and gone.