Lecture slides 7: Responsibility accounting and balanced scorecard Flashcards
(32 cards)
What are the three components of organizational design?
- Organizational structure
- Allocation of decision rights
- Accountability for decisions made
What is meant with the allocation of decision rights?
specifies what decisions employees in a certain role can make without having to ask for approval
Name three characteristics of a centralized decision making style?
Most decision rights reside with corporate headquarters
Command and Control management style
Hierarchical functional organizational structure makes it possible for corporate managers to influence entire organization through decisions
Name two characteristics of decentralized decision making?
Most decisions rights reside with market facing business units
Upside down management style
Name three benefits of decentralization?
- Lower-level managers have best knowledge to react to market demands
- Promotes management skills which ensure leadership continuity
- Managers enjoy higher status from being independent and will be more motivated
Name three costs of decentralization?
- Managers may make decisions not in organization’s best interests
- Managers also tend to duplicate services possibly less expensive if centralized
- Costs of accumulating and processing information frequently rise
What is accountability?
specifies scope of decisions for which managers are being held accountable during their performance evaluation.
- Managers or teams can be classified according to whether they can control costs, revenue or both
- Managers or teams performance can be assessed using key performance indicators (KPI) that they can control
How do you calculate contribution margin?
Sales revenue – Variable expenses = Contribution margin
How do you calculate controllable profit?
Contribution margin – Controllable divisional fixed expenses = Controllable profit
How do you calculate divisional profit before common expenses?
Controllable profit – Non-controllable divisional fixed expenses = Divisional profit before common expenses
How do you calculate divisional profit for the period?
Divisional profit before common expenses – Apportioned cost of common expenses = Divisional profit for the period
What is the controllability principle?
only hold managers responsible for decisions which they can influence y matching performance measures to decision rights
What is full (absorption) costing?
conventional costing system including variable and fixed manufacturing cost as part of product costs. Satisfies matching principle.
What is variable costing?
separate variable and fixed costs. It better meets objectives of internal planning, decision making and performance measurement
What are product and period costs in full costing?
- Product costs: Direct Materials + Direct labor + Variable manufacturing overhead + Fixed manufacturing overhead
- Period costs: Variable & Fixed selling & administrative expenses
What are product and period costs in variable costing?
- Product costs: Direct materials + Direct labor + Variable manufacturing overhead
- Period costs: Fixed manufacturing overhead + Variable & Fixed selling & administrative expenses
Name two ways in which net income is different under full costing than under variable costing?
Net income under full costing exceeds net income under variable costing by (change in inventory * fixed manufacturing cost per unit) when inventory increases (vice versa when inventory decreases)
Net income determined using full costing is affected by changes in inventory level while net income under variable costing is not affected
Waht is return on investment (ROI)
ratio accounting profits earned by business unit divided by investment assigned to it. ROI = Profit / Investment
What is residual income and how do you calculate it?
dollar amount obtained by subtracting a capital charge from the reported accounting profits. RI = Profit – Capital charge
OR
Residual Income = NOPAT – WACC * Invested Capital
What is a capital charge and how do you calculate it?
apply a rate to investment center’s assets = Cost of capital * assets employed
What is return on sales?
firm’s profit per sales dollars. Measures manager’s ability to control expenses and increase revenue to improve profitability. Calculated as Profit / Sales.
What is asset turnover?
amount of dollar sales achieved per dollar of investment. Measures manager’s ability to increase sales from a given level of investment
What is invested capital?
capital invested by a division. Restructure to divest unproductive assets, improve working capital efficiency and improve fixed asset turnover
What is NOPAT?
Net Operating Profit After Tax. Increase profitability trough sales growth, pricing initiatives and cost cutting
