W8 - Divisionalisation and Divisional Performance Measures

Question 1

Advantages of divisionalisation
4

Answer 1

Decentralisation of the decision making process, which can improve quality of decisions through better decision makers as divisional managers have more local knowledge of their area

Decisions should be taken more quickly due to autonomy to make decisions

Frees top management from day to day decision making, can focus on more strategic decisions like M&A

Motivates managers, sas they will be rewarded based on divisional performance

Question 1

Disadvantages of divisionalisation
3

Answer 1

Potential conflict between decisions for the benefit of divisions vs overall company

Greater costs of activities that are common to all divisions by duplication of function e.g. lots of accounting divisions

Risk for top management to lose control over divisions

Question 2

Conditions of divisionalisation
4

Answer 2

Divisons should be
- independent
- engaging in dissiliamar activities
- carefully regulates

• managers need to be held responsible for their actions

Question 3

Contingency factors that divisionalisation is dependent upon
5

Answer 3

Size of organisation
Uncertainty of external environment
Competitive strategy e.g. low cost or product differentiation
Technology
Structure of the organisation

Question 4

Types of Responsibility centre, ranked based on centralisation
4

Answer 4

Cost centre (managers are responsible for costs of their division - this is the most centralised as they are not responsible for much)

Revenues centre

Profit centre

Investment centre (LEAST centralised responsibility centre as they are responsible for so many factors, including costs, revenues and capital investment decisions)

Question 5

Divisional Performance Measures
5 responsibility centres

Answer 5

Cost centres: Variance analysis, efficiency measures

Revenue centre: Revenues, market share

Profit centre: Profit

Contribution centre: Contribution

Investment Centre: ROI, Residual Income, other finance ratios

Question 6

Divisional Profit Statement

Answer 6

Sales:

Less Variable costs
Short run contribution:

Less controllable fixed costs
Controllable contribution:

Less non-controllable, avoidable costs
DIvisional Contribuition:

Less non-controllable, unavoidable costs
DIvisional net profit before taxes:

Question 7

What to use divisional profit statement aspects for

Answer 7

Short run contribution: Decision Making

Controllable contribution: Assessing manager

Divisional contribution: Assessing division/closure

Divisional net profit before taxes: External comparison

Question 8

Calculating ROI & Residual Income (BLANK, check if needed in past papers)