responsibility accounting and centres Flashcards
(34 cards)
what is a centralised vs decentralised org structure?
centralised - top mgment retains major portion of authority. complete executive control over activity maintained by head office, all decisions made at top level = totally centralised
decentralised - top mgment delegates decision making. degree of autonomy exercised by lower level mgrs gives them full control over activities and decisions = totally decentralised.
what characteristics does a centralised org tend to have?
young
small
stable product dev
slow growth rate
high profit impact to incorrect decisions
low confidence in subordinates
tight control
what are the objectives of decentralisation?
goal congruence, motivation for mgment, reduce bureaucracy, better training.
what are the benefits to decentralisation?
helps in training and screening aspiring mgrs, developing leadership qualities, problem solving abilities and decision making skills.
helpful when comparing mgrs results
job satisfaction
effective means of achieving organisational goals
allows mgment by exception
what are the disadvantages of decentralisation?
lack of goal congruence
sub-optimisation (potential for dysfunctional decision making) - mgrs may work on improving performance measures at expense of org as whole, e.g. factory may skimp on maintenance in order to reduce costs and boost profits in short term even though longer term effect is for assets to deteriorate more quickly. this can be overcome with the correct performance evaluation system that prioritises the right things. also helped by introduction responsibility centres
requires more effective communication skills
mgrs required to relinquish control
expensive - training, absorbing cost of poor decisions, development of planning and reporting systems
what are the organisational critical success factors?
quality
customer service
responsiveness to change
speed
what is the difference between service and admin departments?
service departments - provide functional tasks for internal units of an org
admin departments - provide mgment activities for the org
what is responsibility accounting? how does it work?
similar to any other costing system but with greater emphasis on allocating responsibility to person entrusted with mging the process under consideration
thrust of approach is that an org can be split into parts for each of which an individual mgr/mgment team is responsible. budget prepared for each of constituent parts (responsibility centres) and results reported on consistent basis. central method of performance evaluation becomes BvA for each centre.
According to the principle of responsibility accounting, managers delegate decision-making authority but retain responsibility for outcomes.
what are the steps involved in the process of responsibility accounting?
recognising sub-units within the org
assigning decision rights to mgrs
evaluating performance
what is a responsibility reporting system?
involved upward flow of info from org’s sub units to top mgment. provides info about sub units and allows mgment to measure each subunit’s performance
unit level reports are detailed, upper level are summarised. this encourages mgment by exception (delegate as much as possible and intervene only when not meeting standards).
what non-monetary measures could be on a responsibility reporting system report?
backorders
defects
throughput
absenteeism
safety violations
engineering changes
schedule changes
unplanned production interruptions
employee suggestions received/implemented
reduction of NVA time
manufacturing cycle efficiency
on time delivery
complaints
what are the control process steps in a responsibility reporting system?
can relate to financial or non financial factors or combo
compare > plan > gather actual data > compare > managerial influence
what are some key points about reporting responsibility centre results?
results should reflect only controllable costs and revenues - uncontrollable costs may be excluded or clearly segregated. end result is that the results reported are only those for which centre’s mgment is strictly responsible.
results should be compared with a meaningful benchmark - with context of budgetary control system this means budget may be flexed to allow for actual level of output/activity achieved. hence financial control report involves comparison of likes. this issue has been explored earlier in this text.
results should be expressed in a particular context - any results becomes most meaningful when expressed in some context (like a KPI). may be BvA, current actual vs prior actual or actual vs industry wide benchmark.
performance indicators may be financial or not - most meaningful and full form of evaluation may involve a mix of indicators like a balanced scorecard. choice of indicators should be related to key success factors of unit.
what is the controllability principle?
managers should be held responsible for only those decisions for which they are given authority and are in a position to control.
what are controllable costs? are they long term or short?
controllable costs can be influenced by budget holder, and are generally assumed to be variable or directly attributable fixed costs. an item that is controllable for one mgr could be controlled by another, so important to identify areas of responsibility. in long term, all costs are controllable. at senior mgment level, control should be exercised over long-term costs in short term. can differentiate between committed fixed costs (uncontrollable) and discretionary fixed costs which can be controlled in short term (advertising expenditure, executive travel)
how can costs be controlled?
cost are controlled not only by mgment actions but also by certain uncontrollable environmental factors and by the effects of decisions taken by other mgrs
how does using controllable costs affect performance measurement systems?
when perf measurement systems function according to controllability principles, based purely on controllable costs and lead to more relevant rewards for mgrs. when uncontrollable costs included, lead to unpredictable outcomes for mgrs. such measures and rewards are not motivating and therefore mgment may try to control performance measure rather than underlying cost.
incorrect allocation of costs to mgrs could result in a lowering of morale and a reduction of motivation, to be fully effective any system of financial control must provide motivation and incentives.
what are the types of responsibility centre?
cost
revenue
profit
investment
what is a cost centre?
a production or service location, function, activity of item of equipment for which costs are accumulated. can be large or small.
used as a collecting place for costs. cost of operating centre determined for the period and then this total is related to cost units that have passed through.
what should the performance of cost centres focus on?
variances outside the acceptable range
how can cost centres be designed?
can be designed in two ways: given fixed inputs, maximise outputs OR required level of outputs specified and must be achieved with minimum inputs. mgr allowed degree of autonomy in making decisions on how operation is run, but system guides them toward goal congruence. this system relies on measurement of financial spend with no direct incentive for mgr to enhance quality of output, and quality reduction isn’t identified by use of financial perf indicators.
what measures can be used to assess cost centre performance?
cost, cost per unit, cost variances, NFPIs related to quality, productivity, efficiency
when are revenue centres typically used?
in weakest form of decentralisation, simple cost vs revenue centre system used and mgr responsible for cost containment or revenue generation. in such cases single financial measure may be deemed appropriate and performance is likely to be evaluated primarily by reference to materiality of variances between budgeted and actual costs and revenues.
what measures are used to assess revenue centres?
total revenue, revenue per unit, revenue variances
