Ch10 - CHAPTER 10 Performance Evaluation, Variable Costing,...

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CHAPTER 10 Performance Evaluation, Variable Costing, and Decentralization 1. DECENTRALIZATION AND RESPONSIBILITY ACCOUNTING The traditional organization chart, with its pyramid shape, illustrates the lines of responsibility flowing from the CEO down through the vice-presidents to middle- and lower-level managers. Contemporary practice is moving toward a flattened hierarchy, and emphasizing teams is consistent with decentralization. Decentralization is the practice of delegating or decentralizing decision-making authority to lower levels. A. Reasons for Decentralization Reasons for using a decentralized organizational structure include: Gathering and using local information. Focusing of central management. Decentralization allows top management to concentrate on firmwide problems, strategic planning, and decision making. Training and motivating managers. Enhanced competition. Decentralization involves a cost-benefit tradeoff The benefit is decisions are more likely made by managers with specific local knowledge. The cost is that lower level managers are less likely to possess the same incentive as high level managers to maximize the value. B. Responsibility Center A responsibility center is a segment of a business whose manager is accountable for specified sets of activities. Four types of responsibility centers are: cost center—the manager is responsible only for costs revenue center—the manager is responsible only for sales (revenues) profit center—the manager is responsible for both revenues and costs investment center—the manager is responsible for revenues , costs , and investments 2. MEASURING THE PERFORMANCE OF PROFIT CENTERS USING SEGMENTED INCOME STATEMENTS A. Variable versus Absorption Costing Profit centers are evaluated based on income (revenues minus expenses). However, how the income is measured is important for evaluation purposes. Two ways of calculating income are: 1. Variable costing: assigns only variable manufacturing costs to the product cost (direct materials, direct labor, and variable manufacturing overhead).
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2. Full or absorption costing: assigns all manufacturing costs to the product (direct materials, direct labor, variable manufacturing overhead, and fixed manufacturing overhead). Absorption costing is required for external financial reporting and income tax purposes. Variable costing is used for internal reporting to management because it provides information that is useful for planning, control, and decision making. Product and period costs under absorption and variable costing are summarized below: Product costs: direct materials (DM) direct labor (DL) variable overhead (VOH) fixed overhead (FOH) direct materials (DM) direct labor (DL) variable overhead (VOH) Period costs: variable selling expenses fixed selling expenses variable administrative expenses fixed administrative expenses fixed overhead (FOH) variable selling expenses fixed selling expenses variable administrative expenses fixed administrative expenses Variable Costing Absorption Costing
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Ch10 - CHAPTER 10 Performance Evaluation, Variable Costing,...

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