Managerial Accounting-Chapter 11: Performance measures in a decentralized organization

How is margin improved?

1. Increasing selling price 2. Reducing operating expenses 3. Increasing unit sales

Disadvantages of a decentralized organization

1. Lower level managers make decisions w/o considering the company's overall strategy 2. Lack of coordination 3. Lower level managers goals/objectives clash with the goals/objectives of the entire organization 4. Spreading innovative ideas might may be difficult in a decentralized organization.

Criticism of ROI

1. ROI is best with a balance scorecard only because it helps the organization guide itself using the both. 2. Manager who takes over a business segment might inherit many committed costs over which he has no control over. 3. A manager evaluated based on ROI may not take on an investment opportunity that's profitable for the whole organization because it will bring the ROI down.

Advantages of a decentralized organization

1. Top level can focus on bigger issues, such as overall strategies. 2. Puts authority to the hands of people who tend to have the most detailed and up to date information about day to day operations. 3. By eliminating layers of approval/decisions, organizations can respond more quickly to customers and make changes in the operating environment. 4. Granting authority to the lower level managers to make decisions trains them for higher level positions. 5. Increases lower managers confidence and motivation.

Delivery cycle time

= Wait time+throughput time

ROI formula

=NOI/AVG.OP.ASSETS

Throughput time equation

=Process time + Inspection time + Move time + Que time

MCE

=Value added/throughout time

Evaluation using ROI versus residual income

>Encourages the company to make investments that are profitable for the whole company. >Managers being evaluated based on residual incomes will make better investments that ROI managers.

Company's strategy + balance scorecard

>If the balance scorecard is correctly constructed, the performance measures should be linked together on a cause/effect basis. > In essence, the balance scorecard lays out a theory of how the company can take concrete actions to attain its desired customers. >Strategy is plausible, but should only be taken into consideration as theory.

Turnover and excessive op. assets

>Turnover incorporates a crucial area of a managers responsibility-the managers-the investments on an op. assets. >Excessive op. assets can be just as much of a drag on ROI as excessive op. expenses.

NOI

Also referred to as EBIT, it's used because the base of consists of operating assets.

Operating leverage

Because of the given percentage increase in unit sales, NOI increases at an even larger scale.

Compensation

Compensation should occur after a year and be rewarded directly with how well the score card is used.

Investment center

Controls all things in operating assets. ROI determines if the manager is doing a good job or not.

Decentralized

Decision making authority is spread throughout an organization versus being confined to few top executives.

Operating assets

Includes cash, AR, inventory, plant and equipment, and all other assets held for operating purposes. ****Examples of non-op assets: land held for future use, an investment in another company, or a building rented to someone else.***

Balance scorecards

Integrated set of performance measures that are derived from and support a companies strategy.

Downside to residual income?

It can't compare two different sized divisions.

Profit center

Manager of this has control over costs and revenues, but not investment funds. Profit venters are often evaluated based on where the profit they accumulated stands in comparison to the organizations target profit.

Cost center

Manager of this has control over the costs, but not over revenues and use of investment funds. (I.E.) Service departments such as acc., fin., general admin., legal/personnel, etc. >Managers are expected to reduce costs while meeting production needs.

ROI expressed as turnover or margin

Margin=Net op. income/sales Turnover=Sales/avg.assets ROI= Marin x Turnover

Responsibility Accounting

Needed for linking lower level managers decision authority with the accountability of the outcomes of those decisions.

Residual income

Net op. income that an investment center ears above the min. requirement of the ROI. Residual income= NOI-(avg. op. assets x min. rate required).

Common characteristics of balance scorecards

Performance measures: 1. Financial: Performance improved? 2. Customers: Do customers recognize that we are delivering more value? 3. Internal businesses processes: Have we improved key businesses processes so that way we can deliver more value to customers? 4. Learning and growth- Are we improving and changing continually?

EVA

Similar to residual income, but adjustments have been made to GAAP financial statements for performance evaluation purposes.

Delivery cycle time

The amount of time it takes from when a customer's order is received to when it's shipped.

Throughput time

The amount of time required to turn raw materials into completed products.

Responsibility centers

Used for any part of an organization whose manager has control over and is accountable for cost, profit, or investment.

Value added versus non value added

Value added: Process time.....Nonvalue added: Wait time, Que time, Move time, Inspection time.