Responsibility centres Flashcards
(23 cards)
1
Q
How to achieve goal congruence?
A
- Group activities into units
- Decentralise decision-making to lower level managers
- Assign financial responsibilities
2
Q
Centralisation vs decentralisation
A
Centralisation
- Most of the decision-making authority is reserved for top management
- Control is exercised through central planning and monitoring of deviations from these plans
Decentralisation
- Delegation of decision-making authority to lower levels
- Provision of sufficient material and formal resources to execute that authority
- Assignment of accountability and responsibility for the quality of decision-making
3
Q
Decentralisation: Advantages
A
- Greater responsiveness to local needs
- Quicker decision-making
- Increased motivation
- Aids management development and learning
4
Q
Decentralisation: Why need of control systems?
A
Decentralised managers do not automatically:
- Understand the goals and strategies developed by top management and how they can contribute
- Agree with the goals and strategies developed
- Have the right resources to act in line with goals and strategies
- > Responsibility centres
5
Q
Responsibility centres
A
- The assignment of financial responsibility to decentralised units
- The basic structure (skeleton) of the management control system
- Four main types
6
Q
Assigning financial responsibility
A
Dependent on:
- The core operations of the unit based organisational structure
- Functional vs business unit - The measurement possibilities of input and output
- You cant manage want you cant measure - The controllability principle
- Managers should be responsible only for the things they can control/influence - Strategic concerns
7
Q
Organisational structure
A
- The strategy influences how activities are organised into decentralised units - organisational structure
- Organisational structure -> responsibility for operating activities -> financial responsibility
- Three general structures
8
Q
Measurement (1)
A
- You cant manage what you cant measure
Issues:
- Input
- Resources used by RC
- Can we measure it? (monetary or physical terms) - Output
- The result of activities performed in RC
- Can we measure it? - Causality: The relation between input and output
9
Q
Measurement (2)
A
Efficiency: The relation between input and output
- Output/Input
- Doing things right
Effectiveness: The relation between output and objectives
- The more output contributes to objectives, the more effective is the unit
- Doing the right things
- Each RC should be both efficient and effective
10
Q
The controllability principle
A
- Managers should only be responsible for the revenue/expenses/investments they can control or influence
- If not: lack of motivation (at best) or dysfunctional and/or fraudulent behaviour
11
Q
Investment centre
A
- Monetary measures of both input, output and capital used
- Trade-offs between expenses, revenues and capital used
- Appropriate when managers can influence profit and the assets employed in earning it
- The main responsibility is ROI and managers are accountable for investments, revenues and expenses
12
Q
Profit centre
A
- Monetary measures of both input and output
- Trade-offs between expenses and revenues (price, volume, quality and costs)
- Appropriate when managers can influence expenses and revenues but not the investment base
- The main responsibility is profit and managers are accountable for revenues and expenses
13
Q
Profit centre: Pros
A
- Higher information relevance
- Greater responsiveness to competitive challenges
- Frees up senior management through delegation
- Training ground
- Profit consciousness
14
Q
Profit centre: Cons
A
- Lower quality of decision-making at unit level - lack of competent staff
- Risk of intra-firm competition
- Transfer pricing can result in rivalrous behaviour
- Short-term profitability overemphasized
- Sub-optimisation (goal incongruence)
15
Q
Measuring performance in profit centre: influence?
A
Revenue Cost of sales Variable expenses -> Contribution margin Fixed expenses -> Direct profit Controllable corporate charges -> Controllable profit Corporate allocations (other) -> EBIT Taxes -> Net income
16
Q
Revenue centre (1)
A
- Lack of influence over inputs and influence over direct expenses
- Appropriate when managers can influence output and output can be measured in monetary terms but can not influence cost
- The main responsibility is revenues (if setting price) or volume and mix of sales
- No attempt to relate input to output (efficiency?)
17
Q
Revenue centre (2)
A
Goal incongruence?
- Promote low-profit products since they do not know the cost of goods sold?
- Extending credit to customers for higher price (increase revenue, reduce ROI)?
Could be managed by:
- Complementary measures of effectiveness (costumer satisfaction)
- Rules of conduct
- Transforming unit to profit centre
18
Q
Engineered expense centre (standard cost centre)
A
Characteristics:
- Input can be measured in monetary terms
- Output can be measured in physical terms
- Optimal relationship/causality can be established
- The optimum amount of input required to produce one unit of output can be determined (standard cost)
- Main responsibility is cost efficiency (productivity): standard cost vs actual cost
19
Q
Problems with engineered expense centre?
A
Risk of goal incongruence:
- Is employee training and development reduced to reduce cost?
- Minimizing manufacturing costs at the expense of quality?
20
Q
Main difference between engineered and discretionary?
A
Engineered expenses can be estimated with reasonable reliability, whereas for discretionary/managed expenses no such engineered estimate is feasible. Instead expenses depends on management’s judgement of what is appropriate.
21
Q
Discretionary expense centre
A
- Appropriate when output cant be readily measured and no standard cost can be derived
- No optimal relationship between input and output can be established (R&D, time lag)
- Focus on desired level and quality of output
- Set a discretionary budget for acceptable levels on input (incremental vs zero-based)
22
Q
Problems with discretionary expense centre?
A
Risk of goal incongruence:
- Functional excellence vs “good enough”
- > Use non-financial measures
23
Q
Summary: generic types of RCs
A
Engineered
- Input in monetary terms
- Output in physical terms
- Optimal relationship between input and output
Discretionary
- Input in monetary terms
- Difficult to measure output in physical terms
- No optimal relationship between input and output
Revenue centre
- Output in monetary terms
- Input not related to output
Profit centre
- Input in monetary terms
- Output in monetary terms
- Inputs related to output
Investment centre
- Input in monetary terms
- Output in monetary terms
- Profit related to capital
