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Unformatted text preview: Chapter 12 Decentralization and Performance Evaluation QUESTIONS 1. Four advantages are: (a) Subunit managers have better information than top management, (b) Subunit managers can respond to changing conditions faster than top management can, (c) Managers who are given significant decision making authority tend to work harder than others, and (d) Decentralization provides managers training for higher management positions. 2. Two disadvantages are: (a) Decentralization my result in costly duplication of activities and (b) Managers may take actions to achieve their own goals at the cost of the goals of the company as a whole. 3. Some managers prefer exercising control over a greater number of employees and larger facilities. They tend to maximize their subunit size even though it may not be in the companys best interest. This phenomenon is referred to as empire building. 4. Because subunits operate as relatively independent entities, they often perform basic activities, such as purchasing, accounting, and data processing, separately from other subunits, resulting in costly duplication of these activities. 5. As subunit managers are given authority to make decisions, they tend to work toward achieving their own goals, which are sometimes incompatible with company goals. This problem is referred to as lack of goal congruence. 6. Cost centers, profit centers, and investment centers are responsibility centers. They are distinguished by whether their managers are given authority (and consequently are held accountable for), costs (cost centers), costs and revenues (profit centers), or profit and investments (investment centers). 7. EVA (economic value added) is essentially residual income with some adjustments to correct accounting distortions. For example, research and development is reported as an expense according to GAAP, but capitalized as an intangible asset and subsequently amortized in calculating EVA. Jiambalvo Managerial Accounting 8. The financial measures of performance are backward looking in the sense that they report the financial effect of past actions. They do not reveal managements current performance which affects future profits. 9. FinancialROI, growth in sales CustomerCustomer satisfaction, market share Internal ProcessDefect rate, lead time InnovationNumber of patents, employee satisfaction. 10. Using market price as a transfer price allows both buying and selling divisions to be treated as independent companies and is likely to be considered fair and reasonable by both divisions. EXERCISES E1. [LO 6] Interest expense is a charge for capital (specifically, capital provided by debt holders). In calculating EVA, we multiply investment by the weighted average cost of capital to calculate the cost of using capital provided by debt holders and stockholders, and this amount is subtracted from NOPAT. If we deducted interest expense in calculating NOPAT, we would be double counting the cost of capital...
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