Accounting Chapter 11

advantages of decentralization

By delegating day-to-day problem solving to lower-level managers, top management can concentrate on bigger issues, such as overall strategy, Empowering lower-level managers to make decisions puts the decision-making authority in the hands of those who tend to have the most detailed and up-to-date information about day-to-day operations, By eliminating layers of decision making and approvals, organizations can respond more quickly to customers and to changes in the operating environment, Granting decision-making authority helps train lower-level managers for higher-level positions. Empowering lower-level managers to make decisions can increase their motivation and job satisfaction.

The major disadvantages of decentralization include:

Lower-level managers may make decisions without fully understanding the company's overall strategy. If lower-level managers make their own decisions independently of each other, coordination may be lacking. Lower-level managers may have objectives that clash with the objectives of the entire organization.1 For example, a manager may be more interested in increasing the size of his or her department, leading to more power and prestige, than in increasing the department's effectiveness. Page 479 Spreading innovative ideas may be difficult in a decentralized organization. Someone in one part of the organization may have a terrific idea that would benefit other parts of the organization, but without strong central direction the idea may not be shared with, and adopted by, other parts of the organization.

EBIT

Net operating income is income before interest and taxes and is sometimes referred to as EBIT

profit center

The manager of a profit center has control over both costs and revenue, but not over the use of investment funds

decentralized organizations

decision-making authority is spread throughout the organization rather than being confined to a few top executives.

cost center

he manager of a cost center has control over costs, but not over revenue or the use of investment funds.

operating assets

include cash, accounts receivable, inventory, plant and equipment, and all other assets held for operating purposes

responsibility center

is used for any part of an organization whose manager has control over and is accountable for cost, profit, or investments. The three primary types of responsibility centers are cost centers, profit centers, and investment centers.

ROI =

margin x turnover

residual income

net income - (average operating assets x minimum required rate of return)

return on investment formula

net operating income/ average operating assets

margin=

net operating income/sales

turnover

sales/ average operating assets

investment center

the manager of an investment center has control over cost, revenue, and investments in operating assets.

downside to using netbook value with ROI

using net book value in the calculation of average operating assets results in a predictable pattern of increasing ROI over time as accumulated depreciation grows and discourages replacing old equipment with new, updated equipment