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Unformatted text preview: C HAPTER 12 P ERFORMANCE E VALUATION IN D ECENTRALIZED O RGANIZATIONS S OLUTIONS R EVIEW Q UESTIONS 12.1 Firms decentralize because, as organizations grow, the number and types of decisions that need to be made increase substantially. A single individual will not have the relevant ex- pertise and knowledge to make all of these decisions – thus, firms delegate decision-mak- ing responsibility. 12.2 The benefits include (1) timely decisions, (2) tailoring managerial skills and specializa- tions to job requirements, (3) empowering employees, and (4) training future managers. The costs include (1) an emphasis on local versus global goals, (2) requires coordination of decisions, and (3) can lead to improper decisions because of a divergence between in- dividual and organizational goals. 12.3 (1) Cost centers, (2) Profit centers, and (3) Investment centers. 12.4 Minimize the cost of producing a specified level of output or service. 12.5 Both minimize costs and maximize revenues. That is, maximize profit. 12.6 Maximize the returns from invested capital, or to put the capital invested by owners and shareholders of the organizations to the most profitable uses. 12.7 Controllability and informativeness. 12.8 An ideal performance measure (1) aligns employee and organizational goals, (2) yields maximum information about the decision or actions of the individual or organizational unit, (3) is easy to measure, and (4) is easy to understand and communicate. 12.9 In the short-term, via budget variances. In the long-term, by techniques such as bench- marking and kaizen. 12.10 Kaizen is a philosophy of continuous improvement. 12.11 By budget variances and comparing actual profit with past profit and industry profit. Or- ganizations also use revenue-oriented measures such as customer satisfaction and market share. Additional cost-oriented measures might focus on employee turnover or process improvements. 12.12 ROI = return on investment = profit divided by investment. ROI is an effective summary of business profitability – it controls for size by expressing the return per investment dol- lar. Consequently, it is easy to compare the performance of investment centers of differ- ent size. We also can decompose ROI into smaller pieces, allowing managers to see how individual actions map into overall profitability. The major criticism of ROI is that it can foster underinvestment. For example, if current ROI is 20%, a manager may not invest in a project with an ROI of 18% even though the firm’s cost of capital is 15%. It also favors divisions with older assets. Balakrishnan, Managerial Accounting 1e FOR INSTRUCTOR USE ONLY 12.13 Residual income = Profit – (required return * Investment). Residual income represents the additional profit or value generated by an investment after meeting the required rate of return. Economic value added is a modified calculation of residual income – it uses a weighted average cost of capital and adjusts for the operating and capital costs of a busi-...
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This note was uploaded on 02/02/2010 for the course BUS-A 202 taught by Professor Keenan during the Spring '08 term at Indiana.
- Spring '08