jump to pg search ebo CHAPTER 15. Performance Evaluation Page 538 DECENTRALIZATION CONCEPT LO 15-1 Describe the concept of decentralization. Lecture Video LO 15-1 Effective responsibility accounting requires clear lines of authority and responsibility. Divisions of authority and responsibility normally occur as a natural consequence of managing business operations. In a small business, one person can control everything: marketing, production, management, accounting. In contrast, large companies are so complex that authority and control must be divided among many people. Consider the hiring of employees. A small business usually operates in a limited geographic area. The owner works directly with employees. She knows the job requirements, local wage rates, and the available labor pool. She is in a position to make informed hiring decisions. In contrast, a major corporation may employ thousands of employees throughout the world. The employees may speak different languages and have different social customs. Their jobs may require many different skills and pay a vast array of wage rates. The president of the corporation cannot make informed hiring decisions for the entire company. Instead, he delegates authorityto a professional personnel manager and holds that manager responsiblefor hiring practices. Decision-making authority is similarly delegated to individuals responsible for managing specific organization functions such as production, marketing, and accounting. Delegating authority and responsibility is referred to as decentralization.Responsibility Centers Decentralized businesses are usually subdivided into distinct reporting units called responsibility centers. A responsibility centeris an organizational unit that controls identifiable revenue or expense items. The unit may be a division, a department, a subdepartment, or even a single machine. For example, a transportation company may identify a semitrailer truck as a responsibility center. The company holds the truck driver responsible for the revenues and expenses associated with operating the truck. Responsibility centers may be divided into three categories: cost, profit, and investment. A cost centeris an organizational unit that incurs expenses but does not generate revenue. Cost centers normally fall on the lower levels of an organization chart. The manager of a cost center is judged on his ability to keep costs within budget parameters. A profit centerdiffers from a cost center in that it not only incurs costs but also generates revenue. The manager of a profit center is judged on his ability to produce revenue in excess of expenses. Investment centermanagers are responsible for revenues, expenses, and the investment of capital. Investment centers normally appear at the upper levels of an organization chart. Managers of investment centers are accountable for assets and liabilities as well as earnings.
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