Chapter 12

Advantages of Decentralization

- lower level managers gain experience in decision-making - decision-making authority leads to job satisfaction - lower level decision often based on better information

Profit Centre:

A segment whose manager has control over both costs and revenues, but no control over investment funds. An example would be managers of individual stores or a major retail chain.

Cost Centre:

A segment whose manager has control over costs, but not over revenues or profits. Examples are: accounting, finance, general admin and HR

Investment Centre:

A segment whose manager has control over costs, revenues and profits and investments in operating assets. An example would be corporate headquarters.

For purposes of determining costs to be included in each segment's performance evaluations, in general common fixed costs should be allocated to each segment and traceable fixed costs should not be assigned to segments

False

Profit centre margins are authorized to make decisions about pricing, production, operations and capital acquisitions

False

Support departments within an organization such as information technology, cannot be evaluated as profit centres as they have no external sales revenue

False

Transfer prices that one segment of an organization charges other segments of the same organization are always the costs of the goods or services provided

False

Disadvantages of Decentralization

May be a lack of coordination among autonomous managers May be difficult to spread innovative ideas in the organization

A key feature of the balanced scorecard performance measurement system is that the difference dimensions are linked together

True

An investment centre has the highest level of responsibility from a performance management perspective

True

Cost centre managers are often evaluated by comparing actual costs under their control against budgeted or standard costs using variance analysis

True

ROI and residual income can be used as performance measures

True

Residual income is the net operating income that an investment centre earns above the minimum required return on the investment in operating assets

True

The return on investment can ordinarily be improved by either increasing sales, reducing expenses, or reducing operating assets, assuming each of the other factors remain unchanged.

True

The use of return on investment as a sole performance measure may lead managers to make decisions that are not in the best interests of the company as a whole

True