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Lecture - Decentralization and Responsibility Acctg

The document discusses decentralization and responsibility accounting. It defines decentralization as dividing a firm into divisions with a degree of autonomy and decision-making. Responsibility accounting assists managers by establishing budgets, comparing actual to flexible budgets, and reporting variances. It facilitates delegation while promoting goals-based evaluation. Effective systems require defined structures, standards, accounting/feedback systems, and responsibility centers where managers control costs, revenues, or investments.

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Nick Jagolino
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295 views23 pages

Lecture - Decentralization and Responsibility Acctg

The document discusses decentralization and responsibility accounting. It defines decentralization as dividing a firm into divisions with a degree of autonomy and decision-making. Responsibility accounting assists managers by establishing budgets, comparing actual to flexible budgets, and reporting variances. It facilitates delegation while promoting goals-based evaluation. Effective systems require defined structures, standards, accounting/feedback systems, and responsibility centers where managers control costs, revenues, or investments.

Uploaded by

Nick Jagolino
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© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PPT, PDF, TXT or read online on Scribd
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DECENTRALIZATION & RESPONSIBILITY ACCOUNTING

General Forms of Management


Centralization (centralized) Form of organization where the firm requires top management to make most decisions and control most activities of the organizational units, usually from the orgs central office. Decentralization (decentralized) Form of organization where the firm is divided into divisions, departments, units, sub-units. The responsible officer possesses a certain degree of autonomy, independence in operations and decision-making functions.

Benefits of Decentralization Enhanced specialization People assigned in sub-units are specialists Allowing people certain autonomy in decision-making prepares them for future higher responsibilities

Training

Motivated Managers

People with certain decisionmaking functions have greater motivation than those who merely execute decisions of others

Benefits of Decentralization.. Provides time relief to upper-level managers, enabling them to devote more time to strategic planning Delegating decision-making enables the organization to respond in a timely manner to opportunities, as well as to problems, as they arise.

Defined Span of Control

Faster Decision-making

Disadvantages of Decentralization Need for competent people Without which, best policies break down, control is rendered ineffective and lack of control reduces efficiency. Measurement system should be applicable to all divisions; should provide consistency in reporting period and method of reporting, and in data gathering Division managers may work for their own interests without consideration of the benefits to the entire organization.

Measurement system

Sub-optimization

CONTROL MECHANISM
Sometimes, sub-units act in ways that are not consistent with the goals of the total organization; Control mechanism must be provided to ensure that the sub-units do not totally act unfavorably against the goals of the organization, through performance evaluation of the responsible officers concerned. This control mechanism is Responsibility Accounting

RESPONSIBILITY ACCTG
OBJECTIVE It assists organizational unit managers in conducting basic control functions: A budget is prepared and used to officially communicate expected results and delegate authority to implement; Operating reports, based on flexible budget, are compared with actual results; budgetary balances are periodically prepared and reported for review by top management

RESPONSIBILITY ACCTG
OBJECTIVE.. Awareness of significant variances by unit managers can prompt them to immediately correct problems before such reports are presented to higher level of management for appropriate action. Foregoing considered, reports submitted to top management will, as a result, will already show resolution of problems and /or explanation why problems were not or could not be resolved.

RESPONSIBILITY ACCTG
Advantages It facilitates delegation of decision-making; It helps promote the concept of Management by Objective (MBO) wherein managers agree on a common set of goals and their performance evaluated on the basis of their attainment of goals;

RESPONSIBILITY ACCTG
Advantages.. It complements establishment of standards of performance upon which the efficiency and effectiveness of the sub-units are evaluated; It permits effective use of management by exception, which encourages unit managers to focus on operational factors which are significant deviation from plans.

BASIC CONDITIONS FOR AN EFFECTIVE SYSTEM


Well defined organizational structure Areas of jurisdiction must clearly be established and understood, as well as the financial responsibilities

Well defined standards of performance

Integrated plan for control of operations as well as the procedures to effectuate the plan.

BASIC CONDITIONS FOR AN EFFECTIVE SYSTEM.....

Accounting system

A system that records, measures and classifies actions in order to produce performance reports; a system that can identify revenues, expenses and assets to specific units in the organization.

BASIC CONDITIONS FOR AN EFFECTIVE SYSTEM.....

Feedback system

A system that provides regular reports showing the planned results, actual results and highlighting deviations from the plan. (To include only items that affect performance of the subunit, controllable by the manager or direct costs of the segment)

PEFORMANCE REPORTS

An effective responsibility accounting system requires the determination of the range of authority, influence and control the manager has over revenues, costs and investment.

Responsibility Center A unit within the organization which has control over costs, revenues and/or investment funds.

RESPONSIBILITY CENTER (Types)

Cost Center

Responsibility center wherein the manager has authority only to incur costs.

Cost center, as well as the manager, is evaluated through the variance analysis reports

RESPONSIBILITY CENTER (Types..)


Responsibility center wherein the manager is accountable only for Profit/revenue the generation of revenues (no center control over selling prices or budgeting costs) Profit center is measured by using the contribution approach to cost allocation; or, the determination of the profit centers contribution to the recovery of indirect cost of the company; or, budgeted revenues and costs using flexible budget

RESPONSIBILITY CENTER (Types.....)


Investment center
Responsibility center wherein the manager is responsible for generation of revenues and planning and controlling expenses and has authority to acquire, utilize, and to dispose assets

Performance of investment center is measured through determination of its Return on Investment (ROI) and Residual Income (RI).

Performance Evaluation
Cost and Profit Centers a) Responsible Officer Costs that may be influenced by unit managers in a given time period. Costs assigned only to the responsibility center by top management , not under the control of the unit manager, i.e. rental assigned to production department.

Controllable costs

Noncontrollable costs

Performance Evaluation.....
Cost and Profit Centers b.1) Responsibility center Costs directly incurred by the center. These can be avoided by the elimination of the center. Costs assigned or allocated only to the center as its share in the total costs incurred by the entire organization. These costs are unavoidable. It can not be avoided by the elimination of the center.

Direct costs

Indirect costs

Performance Evaluation.....
Cost and Profit Centers
b.2 Responsibility Center - Measure of performance)

Positive direct contribution margin

This indicates that the center/segment is performing favorably.

Negative direct contribution margin

This indicates that the center/segment is rather contributing a loss to the organization.

Performance Evaluation.....
For Investment Center Measures for profit and cost centers are applicable, plus following additional measures:

A. Return on Investment (ROI)

Most common investment center performance measure ROI = Segment Net Income Invested Capital

Performance Evaluation.....
For Investment Center Measures for profit and cost centers are applicable, plus following additional measures:

Alternative ROI formula (DuPont model)

ROI = Income x Sales Revenue

Sales Revenue Invested Cap.

Basic Terms in Performance Evaluation.....


For Investment Center Measures for profit and cost centers are applicable, plus following additional measures:
Another performance measure Centers actual income Pxxx Less: Imputed centers income: (Invested cap, initial or average, x Imputed interest rate xxx Residual income Pxxx

B. Residual Income (RI)

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