Kinney 8e_SM Ch13


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CHAPTER 13 RESPONSIBILITY ACCOUNTING, SUPPORT DEPARTMENT ALLOCATIONS, AND TRANSFER PRICING QUESTIONS 1. Four potential advantages of decentralization are: Better executed executive training and development Higher level of job satisfaction for employees Effectiveness and speed of decision making by local managers with intimate knowledge of problems Reduced management oversight time through use of "management by exception principle" Three potential disadvantages of decentralization are: Suboptimization by plant or outlet managers Possibility of organizational disruption if top management has difficulty in relinquishing control or communicating to subordinates Potentially high costs of incorrect decisions by subordinates Functions that may be handled centrally: Capital project approval 1) Major costs for long-term commitments 2) Specialized knowledge 3) Need for coordination in the selection and funding of major projects Cash management 1) Cash and investment funds are managed more efficiently if they are pooled 2) When funds are needed, tradition and good business dictate that they are acquired at the firm level and allocated to segments as needed. 3) Cash is the most vulnerable asset and merits tight central control. Inventory control Inventory, being a near-cash asset, is subject to theft and misappropriation. Its control is also crucial to efficient and effective production, delivery and customer relations. Evaluation of divisional profitability Top management must reward or penalize division managers as a matter of appropriate organizational hierarchical prerogatives. 1
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Chapter 13 2. The two basic functions of responsibility reports are to: provide operational managers with information needed for planning, controlling, and decision making for their areas of responsibility and assist top managers in evaluating how well operational managers fulfilled their responsibilities to the organization. It is sometimes appropriate for a company to prepare a single responsibility report for a division. However, many companies prepare two different responsibility reports for a division: one report, which is used to evaluate a manager's performance, shows only the costs controllable by that manager; the second report shows all costs incurred by and assigned to the division so that a notion of the total performance of the division can be gained. If total cost information can be subdivided into controllable and noncontrollable costs for the division manager, then one report can effectively accomplish both purposes. 3. Suboptimization is a condition in which individual managers work to achieve results that are in their own and their segments’ best interests to the detriment of the overall company. Top managers must guard against such behavior by subordinates when authority is delegated to them in a decentralized setting. Suboptimization results from segment managers’ motivation to appear successful
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