Module 7 Flashcards
(37 cards)
What is a decentralization organization, and when does an organization become more decentralized?
> A decentralized organization allows the decisions that affect the day-to-day operations to be made by
the individuals responsible for that specific operation.
> As firms grow in size and complexity, by necessity,
they become more decentralized.
Are most firms either centralized or decentralized? When is something more decentralized?
> Most firms are neither totally centralized nor totally decentralized. The more decision-making that is
done by sub-unit managers, the more decentralized it is.
Are most organizations today decentralized?
> Many organizations today are decentralized. This means that day-to-day operational decisions are made not by a few top people, but rather by persons throughout the organization.
> This approach allows lower management to participate in the decisions that affect their day-to-day
operations. To properly evaluate these decisions, from a financial point of view, a company must be able
to measure the results of the decision.
What are the advantages to decentralization?
- Better information, leading to superior decisions at the sub-unit level
- Faster response to changing circumstances
- Increased motivation as managers make their own decisions
- Excellent training for future executives
What are Disadvantages of Decentralization?
- Costly duplication of activities
- Lack of goal congruence
What is the The Importance of Managing Decentralization?
> The decentralized approach removes executives from day-to-day operational decisions and allows them to focus on more long term and strategic decisions.
> Since decisions are made by the individuals directly responsible for the area affected by the decision,
these people are much more accountable for the decision and often enjoy much more job satisfaction.
> While the above points sound good, it is important to remember that each decentralized decision must
be made with the long term strategic objectives of the organization in mind.
In a centralized organization, lower level management may not be aware of what? What does this mean for decentralized organizations?
> In a centralized organization, lower level management may not be aware of all of the organization’s long
term plans or even of decisions made by other lower level managers that may impact their own.
> Clearly, in a decentralized organization, communication among lower level managers as well as between top and lower level managers is key to the best decision making
We’ve learned that communication is critical to the success of a decentralized organization. To facilitate in this, decentralized firms are generally organized in one of three ways:
- Cost Centres
- Profit Centres
- Investment Centres
How do large firms facilitate communication?
> Large firms will use a combination of these centres depending on the nature of the sub-unit.
What is a cost centre and what are some examples?
> A cost centre is a unit that has control over its costs but not over revenue or investment in the centre.
EXAMPLES:
* Accounting
* Human resources
* Legal
* Manufacturing operations
What should cost centres attempt to do?
Cost centres should attempt to minimize costs while providing the level of service required
How do you Measure the performance of a Cost Centre?
Typical evaluations of cost centres are the comparison of actual cost against budgeted or expected costs
for a given level of production.
What is a profit centre and what are some examples?
> A profit centre is a business unit that has control over both revenue and expenses, but not over
investment.
- A hotel
- A retail store
Profit centres should attempt to do what?
> Profit centres should attempt to maximize revenue and minimize costs while providing the level of
service required, to maximize profit.
How do you Measure the performance of a Profit Centre?
Typical evaluations of profit centres are the comparison of actual revenue, expenses and profit against
budgeted or expected revenue, expenses and profit for a given level of production, sales or service.
What is an investment centre?
> An investment centre is a business unit that has control over revenue, costs and investment in
operating assets that will assist in generating revenue and running the business unit.
What is an example of an assessment centre?
Large, multi-divisional firms such as Coca Cola or Proctor and Gamble are often organized with
Investment Centres. The North American division would not only have responsibility for sales and
costing decisions but they would decide where and when new production facilities would be built. They are deciding how to invest the profits of their division.
How do you measure the performance of an Investment Centre?
Investment Centres are normally evaluated on return on investment (ROI). We will dig deeper into this
calculation a little further on in this module.
Transferring Costs in a Decentralized Organization - how is it done?
Regardless of how widely decentralized our firm is, at some point, our sub-units will be interacting with one another, using each others’ services.
Examples:
* The HR department will do the hiring for the manufacturing department.
* The IT department will maintain the computers in the HR Department.
* The Accounting department will track the costs in the HR and IT departments.
In many cases, sub-units of a company do what to transfer costs? What is this called?
> In many cases, sub-units of a company “sell” goods or services to other sub-units within the same
company.
> The price that is used to value the cost of these internal services is called a Transfer Price.
What are some examples used to set transfer prices?
- Negotiated Prices: A transfer price agreed on between the buying and selling divisions
- Variable Costs: If no market price exists, the variable cost of producing the good or providing
the service. - Fixed Costs: Since using variable cost precludes the selling division from earning a profit in some
cases, full cost is used. - Market Price: If the product is sold or service provided outside the firm, a market price exists and is sometimes used as the transfer price
The correct transfer price is the one that:
> The correct transfer price is the one that motivates managers to make the decision that is best for both
their division and for the company as a whole.
Earlier in the module, we introduced the idea that a business may consist of what? As such, what do companies do and what do they need to do it?
> may consist of several different parts or departments. We learned that these can be broken down into different types of centres (Cost, Profit,
Investment)
> The company invests assets into each of these centres to allow them to perform their duties. How much
money to invest is always a hotly debated issue.
> Management needs a method to evaluate and assess how well each division is using the assets it
currently has. One of the most common measures used is Return on Investment (ROI).
When companies are truly decentralized, each segment operates in what way?
When companies are truly decentralized, each segment operates as its own independent company
within the overall organization. Because the organization has limited resources (cash, labour and
equipment) each segment must compete with other segments for these resources
