Session 17 - Session 17 Organizational Structure, Budgeting...

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Session 17 Organizational Structure, Budgeting and Responsibility Accounting
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Decentralization and Organizational Structure Organizational 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 decentralized and organized around responsibility centers : In that way, top management is freed from the need to make day to day decisions And, decisions relating to local (regional) operations can be made by the local managers who, typical, are best informed to make those decisions
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The basic elements of a well designed organization are 1) an organizational structure , that locates decision-making authority at those points where the information necessary to make a decision can be obtained in a timely and economically efficient way 2) a system of incentives (positive and/or negative) that “aligns” the interests of those who have decision-making authority with those of the firm, so that the decisions they make serve not only their own, individual, interests but also those of the firm. (i.e. so as to minimize any conflict of interests.) 3) a managerial accounting system that a) communicates the firm’s goals (objectives) in a clear and comprehensible way to those who have decision-making authority and, therefore, can affect the firm’s ability to achieve those goals, and b) provides feedback such that the effects of the decisions made are allocated to those organizational units (managers) that made them and, therefore, are responsible for their outcomes
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Organizational Structure
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Responsibility Centers A 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 requirements Examples : HR department, product fabrication department 2. Revenue Center : responsible for controlling revenues to maximize revenue with the resources provided Example : Sales department 3. Profit Center : responsible for controlling costs and revenues consisting of one or more cost and revenue centers. It has a fixed amount of capital but it has the right to make decisions about pricing and input mix Example : A division which must obtain approval from the parent for any new investment. The Trailer Leasing division is a profit center for GE.
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4) Investment Center: responsible for controlling revenues, costs and capital investment -- usually consisting of several profit centers –“a firm within a firm” Example : A subsidiary that makes its own investment decisions and has a “line of credit” from its parent or has the right to obtain external financing. GE Capital is an investment center for GE.
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The Managerial Accounting System
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This note was uploaded on 10/06/2010 for the course FNCE 100 taught by Professor Jaffe during the Spring '10 term at UNC Asheville.

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Session 17 - Session 17 Organizational Structure, Budgeting...

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