S_Session 15 - Responsibility Accounting - Post Class.pdf

Third relevant cost analysis and strategic cost

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Third: Relevant Cost Analysis and Strategic Cost Management Second: Specify the Criteria and Identify the Alternative Actions First: Determine the Strategic Issues Fourth: Select and Implement a Course of Action Fifth: Evaluate Performance Identify and Collect Relevant Information Predict Future Values of Relevant Costs & Revenues Consider Strategic Issues The Strategic Cost Management Decision-Making Process
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1 Decentralization and Organizational Structure Organizational design is driven by three factors: 1) Information asymmetry : Local managers know more about local operations than do top managers. 2) Costly communication : It is costly for local managers to communicate their superior information to top managers. 3) Incentive problems : Employees prefer to use their superior information for their own benefit rather than the firm’s. To minimize the costs that result from these three factors (which, typically increase with the size of the firm), modern large firms are almost always decentralized and organized around responsibility centers . In that way, the central (senior) management is freed from the need to make day-to-day decisions involving local operations enabling it to focus more of its effort on long-term firm-wide issues And, decisions relating to local operations can be made by the local managers who, typical, are best informed to make those decisions
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2 Degree of decentralization: The extent to which decision-making authority is delegated by central management to local managers is determined, in part, by the relative costs of acquiring and communicating decision relevant information . More decentralized organizations are associated with higher costs of communication. A Trade-off in decentralized organizations: On the one hand, centralized decisions are generally best for the firm, as a whole, but may be made too slowly (because of the time and cost of obtaining the necessary information) to be fully effective. On the other hand, while local decisions can be made quickly (because the necessary information is available at a lower cost), they may not be best for the firm as a whole.
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3 To minimize the effect of that trade-off, the basic elements of a well designed organization include 1) an organizational structure , that locates decision-making authority at those points where the information necessary to make a decision can be obtained in a timely and economically efficient way 2) a system of incentives (positive and/or negative) that “aligns” the interests of the decision makers with those of the firm (i.e. its investors/owners), so that the decisions they make serve not only their own, individual, interests but also those of the firm. (i.e. to minimize any conflict of interests.) 3) a managerial accounting and control system that a) communicates the firm’s goals (objectives) in a clear and comprehensible way to those who have decision-making authority, and b) provides feedback such that the effects of the decisions made are linked to those organizational units (managers) that made them.
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Organizational Structure
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