Chapter 10

2. Chapter 10 Decentralized Performance Evaluation

3. Decentralization of Responsibility Decentralization pushesdecision making downto lower-level managers. Decentralization often occurs as organizations continue to grow.

4. Decentralization of Responsibility

5. Responsibility Centers Responsibility accounting gives managers authority and responsibility for a particular part of the organization and then evaluates them based on the results of that area of responsibility. Managers of responsibility centers should be held responsible only for that which they can control.

6. Responsibility Centers Cost Center Revenue Center Profit Center Investment Center Responsibility Centers

7. Cost Centers Cost center managers have the authority to incur costs to support their areas of responsibility.

8. Revenue Centers Revenue center managers are responsible for generating revenues within their areas of the organization.

9. Revenues Sales Interest Other Costs Mfg. costs Commissions Salaries Other Profit Centers Profit Center Profit center managers are responsible for generating a profit (revenue minus cost) within their area of the business.

10. Return on investment (ROI)and residual income Investment Centers Investment Center managers are responsible for generating a profit and investing assets. Investment CenterEvaluation

11. Customers Financial Learningand growth Internalbusinessprocesses The Balanced Scorecard Management translates its strategy into performance measures that employees understand and accept. Performancemeasures

12. The Balanced Scorecard

13. Return on Investment (ROI)

14. Residual Income The hurdle rate is the required return on invested assets, sometimes called the cost of capital. Residual income is the organization’s extra profit, over and above that needed to cover the required return on invested assets.

15. Economic Value Added • Economic value added (EVA™) is used to measure the economic wealth created when a company’s after-tax net operating income exceeds its cost of capital. EVA: • Measures profitability based on after-tax net operating income rather than pre-tax net operating income. • Uses the cost of capital as the hurdle rate. • Uses total capital employed as the measure of investment rather than average invested assets

16. Limitations of Financial Performance Measures Both ROI and residual income are lagging indicators of financial performance. These measures tell how well a company or a division has done in the past but not necessarily how well it will do in the future. To improve short-run financial results, managers may make harmful decisions to cut costs in areas such as research and development, employee training, or quality of manufacturing materials.

17. Goods andServices Transfer Pricing A transfer price is the amount that one division charges when it sells goods or services to another division in the same company. Selling Division Buying Division

18. Transfer Pricing MarketPrice Ceiling Range of PossibleTransfer Prices Could fallanywherein between VariableCost Floor

19. End of Chapter 10