Ch 10 Summary - CHAPTER 10 DECENTRALIZATION: RESPONSIBILITY...

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CHAPTER 10 DECENTRALIZATION: RESPONSIBILITY ACCOUNTING, PERFORMANCE EVALUATION, AND TRANSFER PRICING As a firm grows, there is a need to delegate decision-making responsibilities to subordinates. Most firms tend to be decentralized in decision-making authority. Performance evaluation, management compensation, and transfer pricing are issues related to decentralization and are addressed in this chapter. LEARNING OBJECTIVES After studying Chapter 10, you should be able to: 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. KEY TOPICS The following major topics are covered in this chapter (related learning objectives are listed for each topic). 1. Responsibility Accounting (LO 1) 2. Decentralization (LO 2) 3. Measuring the Performance of Investment Centers (LO 3) 4. Measuring and Rewarding the Performance of Managers (LO 4) 5. Transfer Pricing (LO 5) 6. Setting Transfer Prices (LO 6) I. RESPONSIBILITY ACCOUNTING Responsibility accounting is a system that measures the results of each responsibility center and compares those results with some measure of expected or budgeted outcome. Although the responsibility center manger has responsibility for only the activities of that center, decisions made by that manager can affect other responsibility centers. There are four major types of responsibility centers: - Cost center: A responsibility center in which a manager is responsible only for costs. - Revenue center: A responsibility center in which a manager is responsible only for revenues. - Profit center : A responsibility center in which a manager is responsible for both revenues and costs. - Investment center: A responsibility center in which a manager is responsible for revenues, costs, and investments. II. DECENTRALIZATION Decentralization is the practice of delegating (or decentralizing) decision-making authority to lower levels. The major issues that must be addressed related to decentralization include determining: (1) the appropriate degree of decentralization, (2) how to measure performance, (3) the appropriate method to compensate management, and (4) the appropriate transfer prices. 1
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Decentralization is usually achieved by segmenting the company into divisions. One way in which divisions are differentiated is by the types of goods or services produced. Organizing divisions as responsibility centers not only differentiates them on the degree of decentralization, but also creates the opportunity for control of the divisions through the use of responsibility accounting. There are many reasons a firm might want to decentralize, including:
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Ch 10 Summary - CHAPTER 10 DECENTRALIZATION: RESPONSIBILITY...

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