Session:9 Responsibility Accounting and Decentralization
Summary
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
9.1 Differentiate between Centralized and Decentralized Management
- Management control systems allow managers to develop a reporting structure to help the organization meet its strategic goals.
- In centralized organizations, primary decisions are made by the person or persons at the top of the organization.
- Decentralized organizations delegate decision-making authority throughout the organization.
- Daily decision-making involves frequent and immediate decisions.
- Strategic decision-making involves infrequent and long-term decisions.
9.2 Describe How Decision-Making Differs between Centralized and Decentralized Environments
- Segments are uniquely identifiable components of the business that facilitate the effective and efficient operation of the business.
- Organizational charts are used to graphically represent the authority structure of an organization.
- The CEO of a centralized organization will establish the strategy and make decisions that will be implemented throughout the organization.
- The CEO of a decentralized organization will establish strategic goals and empower managers to achieve the goals.
9.3 Describe the Types of Responsibility Centers
- A responsibility accounting structure helps management evaluate the financial performance of the segments in the organization.
- Responsibility centers are segments within a responsibility accounting structure.
- Five types of responsibility centers include cost centers, discretionary cost centers, revenue centers, profit centers, and investment centers.
- Cost centers are responsibility centers that focus only on expenses.
- Discretionary cost centers are responsibility centers that focus only on controllable expenses.
- Revenue centers are responsibility centers that focus on revenues.
- Profit centers are responsibility centers that focus on revenues and expenses.
- Investment centers are responsibility centers that consider the investments made by the responsibility center.
- Return on investment is a particular type of investment center structure that calculates a responsibility center’s profit percentage relative to the center’s investment.
- Residual income is a particular type of investment center structure that evaluates investments using a common cost of capital rate amongst all responsibility centers.
9.4 Describe the Effects of Various Decisions on Performance Evaluation of Responsibility Centers
- Uncontrollable costs are costs that management or an organization has little or no ability to influence.
- Controllable costs are costs that managers or an organization can influence.
- Managers in a responsibility accounting structure should only be evaluated based on controllable costs.
- Businesses with segments that provide goods to other segments within the business often use a transfer pricing structure to record the transaction.
- The general transfer pricing model considers the opportunity costs involved in selling to internal rather than external customers. This method is difficult to implement and businesses often choose other methods.
- The market price model uses market prices that would be used for external customers as the basis for internal transfers.
- The cost approach uses the company’s cost to make the product as the basis for establishing the transfer price.
- The negotiated model allows the selling and buying segments within the business to determine the transfer price.
- Transfer price arrangements are more difficult in international businesses because of complexities related to taxes, duties, and currency fluctuations.