Ch10 - Cost Management ACCOUNTING AND CONTROL HANSEN &...

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10-1 Cost Management Cost Management ACCOUNTING AND CONTROL ACCOUNTING AND CONTROL
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10-2 Decentralization: Responsibility Accounting, Decentralization: Responsibility Accounting, Performance Evaluation, and Transfer Pricing Performance Evaluation, and Transfer Pricing 10
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10-3 Responsibility Accounting Responsibility Accounting 1 Types of Responsibility Centers 1. Cost center: only responsible for costs 2. Revenue center: only responsible for revenues 3. Profit center: responsible for both revenues and costs 4. Investment center: responsible for revenues, costs, and investments 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.
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10-4 2 Decentralization Decentralization Reasons for Decentralization Better access to local information Cognitive limitations More timely response Focusing of central management Training and evaluation of segment managers Motivation of segment managers Enhanced competition
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10-5 3 Measuring the Performance of Measuring the Performance of Investment Centers Investment Centers Return on investment (ROI) is 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 Margin: portion of sales available for interest, taxes and profit Turnover: how productively assets are being used to generate sales
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10-6 3 Comparison of Divisional Performance Comparison of Divisional Performance Measuring the Performance of Measuring the Performance of Investment Centers Investment Centers
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10-7 3 Comparison of Divisional Performance (cont’d) Comparison of Divisional Performance (cont’d) Measuring the Performance of Measuring the Performance of Investment Centers Investment Centers Operating income divided by average operating assets.
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3 Measuring the Performance of Measuring the Performance of Investment Centers Investment Centers Advantages of the ROI measure 1. Helps managers focus on the relationship between sales, expenses and investment. 2. Encourages cost efficiency. 3. Discourages excessive investment in operating assets Disadvantages of the ROI measure 1. Discourages managers from investing in projects decreasing divisional ROI but increasing profitability of the company overall. 2.
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This note was uploaded on 03/08/2011 for the course ACCT 360 taught by Professor N/a during the Fall '10 term at Mountain State.

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Ch10 - Cost Management ACCOUNTING AND CONTROL HANSEN &...

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