ch10tc - COST MANAGEMENT Accounting & Control...

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COST MANAGEMENT 1 Hansen▪Mowen▪Guan Chapter 10 Decentralization: Responsibility Accounting, Performance Evaluation, and Transfer Pricing
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2 Study Objectives 1. Define responsibility accounting, and describe the four types of responsibility centers. 2. Explain why firms choose to decentralize. 3. Compute and explain return on investment (ROI), residual income (RI), and economic value added (EVA). 4. Discuss methods of evaluating and rewarding managerial performance. 5. Explain the role of transfer pricing in a decentralized firm. 6. Discuss the methods of setting transfer prices.
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3 Responsibility Accounting Types of Responsibility Centers Cost center: only responsible for costs Revenue center: only responsible for revenues Profit center: responsible for both revenues and costs Investment center: responsible for revenues, costs, and investments
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4 Responsibility Accounting Responsibility accounting measures the results of each responsibility center compares those results with some measure of expected or budgeted outcome.
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5 Decentralization Reasons for Decentralization Better access to local information More timely response Focusing of central management Training and evaluation of segment managers Motivation of segment managers Enhanced competition
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6 Return on investment (ROI) the most common measure of performance for an investment center ROI = Operating income ÷ Average operating assets = (Operating income ÷ Sales) × (Sales ÷ Average operating assets) = Operating income margin × Operating asset turnover Measuring the Performance of Investment Centers Margin : portion of sales available for interest, taxes and profit Operating income Sales Turnover : how productively assets are being used to generate sales Sales Average operating assets
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7 Measuring the Performance of Investment Centers
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8 Measuring the Performance of Investment Centers
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Measuring the Performance of Investment Centers Advantages of the ROI measure Helps managers focus on the relationship between sales, expenses and investment. Encourages cost efficiency. Discourages excessive investment in operating assets Disadvantages of the ROI measure Discourages managers from investing in projects decreasing divisional ROI but increasing profitability of the company overall. Encourages managers to focus on the short-term at
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This note was uploaded on 11/14/2009 for the course ACC 2338 taught by Professor Tba during the Fall '09 term at Randolph College.

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ch10tc - COST MANAGEMENT Accounting & Control...

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