Session:9 Responsibility Accounting and Decentralization
Answer Key
Principles of Accounting, Volume 2: Managerial Accounting | Leadership Development – Micro-Learning Session
Rice University 2020 | Michael Laverty, Colorado State University Global Chris Littel, North Carolina State University| https://openstax.org/details/books/principles-managerial-accounting
Questions
1. A management control system allows management to establish, implement, and monitor the organization’s achievement of strategic goals. Once the goals are developed, goals must be communicated throughout the organization and activities of the organization should align to achieve the strategic goals. The control system must also provide feedback and allow for alterations, as necessary, to the organization’s strategic goals.
3. Centralized organizations reserve decision-making authority for top management. Decentralized organizations disperse decision-making throughout the organization. Companies of all sizes may exhibit tendencies for both centralized and decentralized decision-making. For example, while Apple might give its stores great latitude to meet customer needs, the company will reserve research and development activities for the highest levels of the organization.
5. Daily decisions are frequent and usually have a short-term impact. Strategic decisions are infrequent and usually have a long-term impact. Daily decisions impact the operational effectiveness and efficiency of the organization while strategic decisions address the long-term aspect of the business. For example, daily decisions for a grocery store might relate to signage, displays, and inventory levels to maintain. Strategic decisions for a grocery store might include whether or not to offer online ordering or leasing in-store space to other businesses such as a coffee shop, nail salon, or bank.
7. These activities represent a significant cost to the organization, require specialization, relate to strategic and quality goals, and allow for benefits related to buying power. Also, there is the possibility that without centralizing some of these costs, they might experience a significant cost overrun. For example, the company might want to finance capital improvements, and they often can do so less expensively, in terms of interest rates, by packaging bonds into one issue. Similar cost savings and improvements in operational efficiencies could probably be identified in the other examples listed.
9. Answers will vary. Sample answer: McDonald’s might have a policy that all stores must sell items at a price set by the company. The purpose of this is to prevent stores from competing with each other based on price and causing confusion or frustration with customers.
11. Answers will vary. Responses should include factors relating to establishing a competitive pay rate based on the local economy, hiring experienced workers, investing in training, and other factors necessary to ensure the store’s success.
13. Netflix has three segments: Domestic Streaming, International Streaming, and Domestic DVD. Responses should present the following information:
| Domestic Streaming | 2017 | 2016 | 2015 |
| Paid memberships | 54,750 | 47,905 | 43,401 |
| Revenues | $6,153,025 | $5,077,307 | $4,180,339 |
| Contribution profit/(loss) | $2,280,454 | $1,838,686 | $1,375,500 |
| International Streaming | 2017 | 2016 | 2015 |
| Paid memberships | 62,832 | 41,185 | 27,438 |
| Revenues | $5,089,191 | $3,211,095 | $1,953,435 |
| Contribution profit/(loss) | $226,589 | ($308,521) | ($333,386) |
| Domestic DVD | 2017 | 2016 | 2015 |
| Paid memberships | 3,380 | 4,029 | 4,787 |
| Revenues | $450,497 | $542,267 | $645,737 |
| Contribution profit/(loss) | $249,972 | $279,525 | $321,829 |
Responses may note that Domestic Streaming memberships, revenues, and contribution profit are all increasing. International streaming is experiencing significant increases in memberships and revenues, but the contribution loss continues (the loss decreased from 2016 to 2017). The Domestic DVD segment is experiencing declining memberships, revenues, and contribution profit.
15. Answers will vary. Responses should include an organizational chart for a decentralized structure that includes three divisions: residential, corporate, and nonprofit. Under each of these divisions would be the mowing, trimming, and landscaping activities. Alternative responses may present three divisions: mowing, trimming, and landscaping activities with the client categories (residential, corporate, and nonprofit) below each. This is less desirable due to inefficiency. The advantage of this approach is the speed of decision-making and responding to clients. Lavell would need to ensure the quality of the services remains at a high standard.
17. Answers will vary. One example is the transportation division in a school system. The goal of the transportation division is to manage costs while maintaining safety in transporting students.
19. Answers will vary. The benefits of an ROI structure include consideration for the segment’s investment and evaluation of management’s ability to generate profitability. In addition, this framework incentivizes management to undertake value-added investments. A disadvantage is that the segment may prioritize the segment over company financial goals.
21. Answers will vary. Managers can influence controllable costs but have little or no ability to influence uncontrollable costs. While it is common to include uncontrollable (including allocated) costs in the financial information of the responsibility center, managers should be evaluated only on controllable costs.
23. Answers will vary. An advantage of a market-based approach is that the company remains up-to-date on current cost levels. This allows the business to compare its current cost structure to the market and to identify areas where changes are necessary. A disadvantage is this approach is that it requires a significant investment of time and resources on the part of the business.
25. Answers will vary. An advantage of a negotiated approach is that the responsibility center management must be actively involved in the process of establishing the transfer price. This approach may encourage managers to remain attentive to opportunities for cost improvements. A disadvantage would include the possibility of significant disagreements between responsibility center managers.