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Given that managers must be held accountable for decisions, actions, and outcomes, it becomes very
important to align a manager’s area of accountability with their area of responsibility. The “area” of
responsibility can be a department, product, plant, territory, division, or some other type of unit or
segment. Usually, the attribution of responsibility will mirror the organizational structure of the
firm. This is especially true in organizations that have a decentralized approach to decision-making. 1.1 Centralized VS. Decentralized Decision-Making
Sometimes by plan, and sometimes simply as a result of top managements’ leadership style,
organizations will tend to gravitate to either a centralized or a decentralized style of management.
With a centralized style, the top leaders make and direct most important decisions. Lower-level
personnel execute these directives but are generally powerless to independently make policy
decisions. A centralized organization is benefited by strong coordination of purpose and methods,
but it has some glaring deficiencies. Among these are the stifling of lower-level managerial talent,
suppression of innovation, and reduced employee morale. Download free ebooks at bookboon.com
7 Responsibility Accounting and Management by Exception Tools for Enterprise Performance Evaluation Many contemporary business successes have occurred in highly decentralized organizations. Top
management concentrates on strategy, and leaves the day-to-day operation and decision-making
tasks to lower-level personnel. This facilitates rapid “front-line” response to customer issues and
provides for identifying and training emerging managers. It can also improve morale by providing
each employee with a clear sense of importance that is often lacking in a highly centralized
environment. Decentralization can prove a fertile ground for cultivating new and improved products
and business processes. 1.2 Responsibility Centers
A decentralized environment results in highly dispersed decision making. As a result, it is
imperative to monitor and judge the effectiveness of each manager. This is easier said than done.
Not all units are capable of being evaluated on the same basis. Some units do not generate any
revenue; they only incur costs in support of some necessary function. Other units that deliver goods
and services have the potential to be assessed on the basis of profit generation.
As a generalization, the part of an organization under the control of a manager is termed a
“responsibility center.” To aid performance evaluation it is first necessary to consider the specific
character of each responsibility center. Some responsibility centers are cost centers and others are
profit centers. On a broader scale, some are considered to be investment centers. The logical method
of assessment will differ based on the core nature of the responsibility center. 1.3 Cost Center
Obviously most business units incur costs, so this alone does not def...
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