Ch 12 3rd Edition-1 - CHAPTER 12 Decentralization and...

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CHAPTER 12 CHAPTER 12 Decentralization and Decentralization and Performance Evaluation Performance Evaluation
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Decentralized Organizations Decentralized Organizations A decentralized organization is one that  grants substantial decision making  authority to the managers of subunits Most firms are neither totally  centralized nor totally decentralized Typically, decentralization is a matter of  degree
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Advantages of Decentralization Advantages of Decentralization Better information  leading to superior  decisions Managers can  respond quicker  to changing  circumstances Increased motivation  of managers Provides  excellent training  for future top-level  executives
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Disadvantages of Decentralization Disadvantages of Decentralization Costly  duplication of activities Lack of  goal congruence Management pursues personal goals Personal goals are incompatible with the  company’s goals To control goal congruence, companies  evaluate the performance of subunit  managers
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Why Companies Evaluate the Performance of  Why Companies Evaluate the Performance of  Subunits and Subunit Managers Subunits and Subunit Managers A company evaluates subunits in order to  decide if it should expand or contract them or  change their operations  A company evaluates subunit managers in  order to motivate them to take actions that  maximize the value of the firm Reasons for evaluating subunit managers: Identifies successful operations and areas needing  improvement Influences the behavior of managers
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Responsibility Accounting and  Responsibility Accounting and  Performance Evaluation Performance Evaluation Responsibility accounting is a technique that  holds managers responsible only for costs and  revenues that they can control To implement responsibility accounting in a  decentralized organization, costs and  revenues are traced to the organizational level  where they can be controlled
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Tracing Costs to Organizational  Tracing Costs to Organizational  Levels Levels
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Responsibility Centers Responsibility Centers Cost Centers Profit Centers Investment Centers
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Cost Centers Cost Centers Subunit responsible for controlling costs but  not responsible for generating revenue Most service departments are cost centers (i.e.,  janitorial, maintenance, computer services,  production) Must provide service to company at a  reasonable cost Evaluation based on comparison of budgeted  or standard costs with actual costs
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Profit Centers Profit Centers Subunit responsible for generating revenues and  controlling costs Goal is to maximize profit for the division Performance can be evaluated in terms of profitability
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This note was uploaded on 07/08/2009 for the course ACCT 2332 taught by Professor Newman during the Summer '08 term at University of Houston.

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Ch 12 3rd Edition-1 - CHAPTER 12 Decentralization and...

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