Chapter 12 (Jmbalvo) Flashcards
(67 cards)
What are decentralized organizations?
> Firms that grant substantial decision-making authority to the managers of subunits are referred to as decentralized organizations.
What are centralized organizations?
> firms that do not grant substantial decision-making authority to the managers of subunits are referred to as centralized organizations.
Are most firms totally centralized / decentralized?
> Most firms are neither totally centralized nor totally decentralized. Decentralization is a matter of degree. To the extent that more decision-making authority is delegated to subunit managers, a firm is more decentralized.
What is a primary reason for decentralization?
> A primary reason for decentralization is that subunit managers have better information than top management and they can respond more quickly to changing circumstances.
Some firms decentralize because they believe what in respect to managers?
> Some firms decentralize because they believe that managers who are given significant decision-making authority are more motivated and work harder than managers in centralized organizations.
Aside from better information and decision making authority, what is another benefit to decentralized organizations?
> Finally, decentralized organizations provide excellent training for future top-level executives.
> Subunit managers in decentralized organizations are used to making important decisions and taking responsibility for their actions.
> Thus, when high-level positions in the firm need to be filled, the firm has a ready supply of managers with the required decision-making experience.
What is one potential problem with decentralization in terms of operational activities?
> Although decentralization has several beneficial features, it may create problems. One potential problem is that decentralization may result in a costly duplication of activities. For example, two subunit managers may decide to develop their own purchasing departments when one purchasing department would be more economical.
What is another potential problem with decentralization in terms of personal goals of managers? What is this specifically referred to as?
> A second problem with a decentralized organization is that managers of subunits may pursue personal goals that are incompatible with the goals of the company as a whole.
> This problem is referred to as a lack of goal congruence.
What is an example of goal congruence?
> An example of a goal congruence problem is empire building. Some managers derive substantial satisfaction from running large subunits (their empires). Perhaps this satisfaction comes from impressing friends and business associates with the number of employees and the size of the facilities under their control. However, maximizing the size of the subunit, which satisfies the manager’s personal goal, may be incompatible with the overall company goal of profit maximization. Bigger operations are not necessarily more profitable operations.
To control goal congruence problems in decentralized organizations, companies do what?
> companies evaluate the performance of subunit managers.
> the evaluation process should encourage managers of subunits to take actions that are in the interest of the company as a whole.
Summarize the advantages and disadvantages to decentralization:
ADVANTAGES:
> Better information, leading to superior decisions
> Faster response to changing circumstances
> Increased motivation of managers
> Excellent training for future top-level executives
DISADVANTAGES:
> Costly duplication of activities
> Lack of goal congruence
Evaluation of subunits is undertaken to identify what? If a process is successful/unsuccessful, what process is taken?
> successful operations and areas needing improvement. If an operation is deemed successful, top management may perform incremental analysis to determine whether the operation should be expanded.
> If an operation is viewed as underperforming, top management may perform incremental analysis to determine whether the operation should be eliminated or whether funds should be invested to improve it.
What is the main reason why we evaluate subunit managers?
> you get what you measure - evaluations influence behaviour
> performance measures can be used to drive the behavior of managers.
Can you have a good manager and a bad subunit?
> Keep in mind that it is possible to have a good manager and a bad subunit.
> A manager may do all that is reasonably possible to improve a subunit, but the subunit may not be a line of business that the company believes has good long-run profit potential.
> In this case, the company may reward the performance of the manager but still exit the subunit’s line of business.
What is responsibility accounting?
> responsibility accounting, a technique that holds managers responsible only for costs and revenues that they can control
Is responsibility accounting used in decentralized organizations? If so, how is it done?
> This idea should play a prominent role in the design of accounting systems used to evaluate the performance of managers in a decentralized organization.
> To implement responsibility accounting in a decentralized organization, costs and revenues are traced to the organizational level where they can be controlled.
a) in a simplified setting, how implementation of responsibility accounting would suggest that costs be accumulated for what?
b) What costs follow supervisors and why?
c) are overhead costs charged to supervisors? If not, who?
d) are presidents / vps’ charged costs?
[using the textbook example in our answers]
a)
> assessing performance
b)
> Only labor costs and material costs are traced to the individual shift supervisors.
> supervisors make numerous decisions that affect the amount of labor and material costs incurred.
c)
> to the supervisors, because these supervisors are not involved in decisions that affect the amount of overhead incurred
> overhead costs are traced to the individual plant managers, who can control overhead costs.
d)
The vice president of manufacturing is responsible for all of the costs incurred at both the Eastern Plant and the Western Plant. Therefore, all production costs are traced to the vice president.
What are subunits? Are they referred to as for anything else?
> Subunits are organizational units with identifiable collections of related resources and activities.
> A subunit may be a department, a subsidiary, or a division. Subunits are sometimes referred to as responsibility centers, defined as organizational units responsible for the generation of revenue and/or the incurrence of costs.
> Responsibility centers typically are classified as being cost centers, profit centers, or investment centers.
a) What is a cost center?
b) What departments are usually classified under this?
c) What are the managers responsible for?
A) A cost center is a subunit that has responsibility for controlling costs but does not have responsibility for generating revenue.
B) Most service departments (e.g., photocopying, janitorial services, the machine maintenance department, and the computer services department) are classified as cost centers.
C) The managers of these departments are responsible for making sure that their services are provided at a reasonable cost to the company, but they typically do not have responsibility for generating revenue for the firm. Production departments also are classified as cost centers.
A common approach to controlling cost centers is to:
> A common approach to controlling cost centers is to compare their actual costs with standard or budgeted costs.
> If variances from standard are significant, an investigation into the activities of the cost center should be undertaken to determine whether costs are out of control or, alternatively, whether cost standards need to be revised.
What performance metrics are associated with cost centres?
> Other performance measures, such as defect rates, on-time delivery statistics, and measures of customer satisfaction, also can be used to control cost centers.
What is a profit center?
> A profit center is a subunit that has responsibility for generating revenue as well as for controlling costs.
How and why are profit centres evaluated?
> Because both revenues and costs (the two elements that determine profit) are under the control of the profit center manager, the performance of the profit center can be evaluated in terms of profitability.
Companies use a variety of methods to evaluate the profitability of profit centers. Provide some examples:
> Income earned in the current year may be compared with an income target or budget.
> Or income earned may be compared with income earned in the prior year.
> Some firms evaluate profit centers using relative performance evaluation.
> Relative performance evaluation of profit centers involves evaluating the profitability of each profit center relative to the profitability of other, similar profit centers.
