sm_23 21e - CHAPTER 23 PERFORMANCE EVALUATION FOR...

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CHAPTER 23 PERFORMANCE EVALUATION FOR DECENTRALIZED OPERATIONS CLASS DISCUSSION QUESTIONS 1. In the cost center, the department manager is responsible for and has authority over costs only. In a profit center, the manager’s responsibility and authority extend to costs and revenues. 2. The department manager of a profit center has responsibility for and authority over costs and revenues, while the manager of an investment center has responsibility for and authority over investments in assets as well as costs and revenues. 3. The difference in budget performance re- ports prepared for department supervisors and plant managers is the amount of detail provided to each. The departmental super- visors require considerable detail to control costs. The report for the plant managers would contain more summarized cost data for the various departments. 4. A cost center manager is not responsible for making decisions concerning sales or the amount of fixed assets invested in the center. 5. Payroll: Number of checks issued. Ac- counts payable: Number of invoices paid. Accounts receivable: Number of sales in- voices collected. Database administration: Number of reports. 6. The major shortcoming of using income from operations as a measure of invest- ment center performance is that it ignores the amount of investment committed to each center. Since investment center man- agers also control the amount of assets in- vested in their centers, they should be held accountable for the use of invested assets. 7. Revenues and expenses are considered in computing the rate of return on investment because they directly impact the determina- tion of income from operations. Invested assets are considered in computing the rate of return on investment because they are the base by which relative profitability is measured. 8. A division of a decentralized company could be considered the least profitable, even though it earned the largest amount of income from operations, when its rate of return on investment is the lowest. In this situation, the division would be considered the least profitable per dollar invested in the division. 9. By dividing income from operations by the amount of invested assets, each division is placed on a comparable basis of income from operations per dollar invested. 10. Division A. Division A will return 20 cents (20%) on each dollar of invested assets, while Divisions B and C will return only 17 cents and 15 cents, respectively. Thus, in expanding operations, Division A should be given priority over Divisions B and C. 11. A balanced scorecard can indicate the un- derlying causes of financial performance from innovation and learning, customer, in- ternal, and financial perspectives. In addi- tion, a balanced set of measures helps managers consider trade-offs between short-term and long-term financial perform- ance.
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sm_23 21e - CHAPTER 23 PERFORMANCE EVALUATION FOR...

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