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Cost%20Acctg%20Chapter%2010 - Cost Management Chapter 10...

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Cost Management – Chapter  10 Performance Evaluation in the  Decentralized Company (Copyright Protected)
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13 -2 1. Define responsibility accounting , and describe four types of responsibility centers . 2. Tell why firms choose to decentralize . 3. Compute and explain return on investment (ROI) 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. Objectives Objectives
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13 -3 Reasons for Decentralization 1. Ease of gathering and using local information 2. Focusing of central management 3. Training and motivating segment managers 4. Enhanced competition, exposing segments to market forces
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13 -4 Responsibility accounting is a system that measures the results of each responsibility center according to the information managers need to operate their centers.
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13 -5 Types of Management 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 sales. 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 the related investments to generate the revenues.
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13 -6 ACCOUNTING INFORMATION USED TO MEASURE ACCOUNTING INFORMATION USED TO MEASURE PERFORMANCE PERFORMANCE Capital Capital Cost Sales Investment Other Cost Sales Investment Other Cost center x Revenue center Direct cost x only Profit center x x Investment center x x x x
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13 -7 Major Responsibilities: Allocate scarce resources within the Company Maximize Shareholder Value/Wealth Key Focus for this Chapter: Investment Center Transfer Pricing Top Management Top Management
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13 -8 Investment Center Performance Measures (use all): Return on Investment Residual Income Economic Value Added (EVA) Transfer Pricing (no single answer – best fit) : Market Price Negotiated Transfer Price Cost Based Transfer Pricing Investment Centers & Transfer Pricing Investment Centers & Transfer Pricing
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13 -9 Measures both the income statement (performance results) and balance sheet (resources utilized) to evaluate segments of the company such as divisions or product lines or the entire company. Can’t measure performance by income alone as the resources utilized to generate the income is important Applies to all: ROI, Residual Income and EVA Investment Centers Investment Centers
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13 -10 Return on Investment Return on Investment ROI = Operating income Average operating assets Beginning net book value + Ending net book value 2
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13 -11 ROI Detail Formula Margin on Sales Turnover of Assets ROI = Operating Income x Sales Sales Average Operating Assets (NBV) ROI = Operating Income Average Operating Assets (NBV)
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13 -12 Operating income: income before interest and taxes (not EBITDA) Operating assets: all assets used to generate income
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