Session 17 - Session 17 Organizational Structure Budgeting...

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Session 17Organizational Structure, Budgeting and Responsibility Accounting
Decentralization and Organizational StructureOrganizational design is driven by three factors (potential problems):1)Information asymmetry: Local managers know more about local operations than do top managers.2)Costly communication: It is costly for local managers to communicate their superior information to top managers.3)Incentive problems: Employees prefer to use their superior information for their own benefit rather than the firm’s.To minimize the costs that result from these three factors, modern large firms are almost always decentralizedand organized around responsibility centers:In that way, top management is freed from the need to make day to day decisionsAnd, decisions relating to local (regional) operations can be made by the local managers who, typical, are best informed to make those decisions
3)a managerial accounting systemthat
Organizational Structure
Responsibility CentersA well designed firm is organized around four basic types of responsibility centers:1.Cost Center: responsible for controlling costs to minimize costs while meeting output requirementsExamples: HR department, product fabrication department2.Revenue Center: responsible for controlling revenues to maximize revenue with the resources providedExample: Sales department3.Profit Center:responsible for controlling costs and revenuesconsisting of one or more cost andrevenue centers. It has a fixed amount of capital but it has the right to make decisions about pricing and input mixExample: A division which must obtain approval from the parent for any new investment. The Trailer Leasing division is a profit center for GE.
The Managerial Accounting System

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