Decentralization, Responsibility Centers, and Transfer Pricing,Centralization and Decentralization Spectrum,High degree of delegation of duties, power, and authority to lower levels of the organization,High degree of retention of duties, power, and authority by top management,Decentralized,Centralized,Neither centralization nor decentralization is necessarily a desirable organizational goal!,Decentralization in Organizations,Benefits of Decentralization,Top management freed to concentrate on strategy.,Lower-level managers gain experience in decision-making.,Decision-making authority leads to job satisfaction.,Lower-level decision often based on better information.,Improves ability to evaluate managers.,Decentralization in Organizations,Disadvantages of Decentralization,Lower-level managers may make decisions without seeing the “big picture.”,May be a lack of coordination among autonomous managers.,Lower-level managers objectives may not be those of the organization.,May be difficult to spread innovative ideas in the organization.,Decentralization and Segments,A segment is any part or activity of an organization about which a manager seeks cost, revenue, or profit data. A segment can be . . .,Quick Mart,An Individual Store,A Sales Territory,A Service Center,Cost, Profit, and Investments Centers,Cost Center A segment whose manager has control over costs, but not over revenues or investment funds.,Cost,Cost,Cost,Cost, Profit, and Investments Centers,Profit Center A segment whose manager has control over both costs and revenues, but no control over investment funds.,Revenues,Sales Interest Other,Costs,Mfg. costs Commissions Salaries Other,Cost, Profit, and Investments Centers,Investment Center A segment whose manager has control over costs, revenues, and investments in operating assets.,Corporate Headquarters,Cost, Profit, and Investments Centers,Responsibility Center,Cost Center,Profit Center,Investment Center,Cost, profit, and investment centers are all known as responsibility centers.,Return on Investment (ROI) Formula,Cash, accounts receivable, inventory, plant and equipment, and other productive assets.,Income before interest and taxes (EBIT),Return on Investment (ROI) Formula,Regal Company reports the following: Net operating income $ 30,000 Average operating assets $ 200,000 Sales $ 500,000,Controlling the Rate of Return,Three ways to improve ROI . . .,Increase Sales,Reduce Expenses,Reduce Assets,Controlling the Rate of Return,Regals manager was able to increase sales to $600,000 which increased net operating income to $42,000. There was no change in the average operating assets of the segment.,Lets calculate the new ROI.,Return on Investment (ROI) Formula,Net operating income Sales,Salesaaaaaaaaa Average operating assets,ROI =,$42,000 $600,000,$600,000 $200,000,21%,We can modify our original formula slightly:,ROI =,ROI =,We increased ROI from 15% to 21%,Margin,Turnover,Criticisms of ROI,In the absence of the balanced scorecard, management may not know how to increase ROI.,Managers often inherit many committed costs over which they have no control.,Managers evaluated on ROI may reject profitable investment opportunities.,The Balanced Scorecard,Management translates its strategy into performance measures that employees understand and accept.,Performancemeasures,Financial,Customers,Learningand growth,Internalbusinessprocesses,Criticisms of ROI,As division manager at Winston, Inc., your compensation package includes a salary plus bonus based on your divisions ROI - the higher your ROI, the bigger your bonus. The company requires an ROI of 15% on all new investments - your division has been producing an ROI of 30%. You have an opportunity to invest in a new project that will produce an ROI of 25%.,As division manager would you invest in this project?,Criticisms of ROI,As division manager, I wouldnt invest in that project because it would lower my pay!,Criticisms of ROI,Gee . . . I thought we were supposed to do what was best for the company!,Residual Income - Another Measure of Performance,Net operating income above some minimum return on operating assets,Residual Income,A division of Zepher, Inc. has average operating assets of $100,000 and is required to earn a return of 20% on these assets. In the current period the division earns $30,000.,Lets calculate residual income.,Residual Income,Motivation and Residual Income,Residual income encourages managers to make profitable investments that would be rejected by managers using ROI.,Company As return on investment (ROI) is: A)36%. B) 20%. C) 15%. D) 4%.,The following information is available on Company A: Sales$900,000 Net operating income 36,000 Stockholders equity 100,000 Average operating assets 180,000 Minimum required rate of return15%,The following data are available for the South Division of Redride Products, Inc. and the single product it makes: Unit selling price$20 Variable cost per unit$12 Annual fixed costs$280,000 Average operating assets$1,500,00