Chapter 8 - Responsibility centres Flashcards
What does decentralisation seek to overcome?
The problem of managing a large organisation by creating a structure based on several autonomous decision-making units
What are the objectives of decentralisation?
Ensures goal congruence
Increase motivation of management
Reduce head office bureaucracy
Provide better training for junior and middle management
What is a cost centre?
Production or service location, function, activity or item of equipment for which costs are accumulated
What is a revenue centre?
Responsibility centre that is devoted to raising revenue without any link to the associated costs
What is a controllable cost?
Cost ‘which can be influences by its budget holder’
What are the three KPI’s which can be used for profitability?
C = ROCE
B = Asset turnover
A = Operating profit margin
There is a direct relationship between the three figures. A x B = C
What are the two liquidity ratios?
Current ratio
Acid test (quick ratio)
What are the pros of return on investment?
A widely used and accepted measure
As a relative measure it enables comparisons to be made with divisions or companies of different sizes
It can be broken down into secondary rations for more detailed analysis
What are the cons of return on investment?
May lead to dysfunctional decision making
Different accounting policies can confuse comparisons
ROI increases with age of assets if NBVs are used, thus giving managers and incentive to hang on to possibly inefficient, obsolete machines
Could encourage manipulation to achieve ROI related bonuses
What are the pros of residual income?
RI resolves dysfunctional aspect of the ROI measure
RI reduces ROI’s problem of rejecting projects with a ROI in excess of the company’s target, but lower than the division’ current ROI
Cost of financing a division is brought home to divisional managers
Risks can be incorporated
What are the cons of residual income?
RI does not facilitate comparisons between divisions
RI does not relate the size of a divisions profit to the assets employed in order to obtain that profit
RI can also mislead, as it increases over time
Subject to manipulation
What is economic value added a measure of?
Performance similar to residual income, except the profit figure used is the ECONOMIC profit and the capital employed figure used is the ECONOMIC capital employed
What is report visualisation?
The process of presenting report formats that represent data and information in a pictorial or graphical format.
What are the five principles for effective report visualisation?
Ensure data is optimised
Relevant visualisation tool must be applied
An appropriate report layout must be chosen
The reader experience must be optimised
Visualisation to the appropriate delivery channel must be optimised
