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Chapter 11 Performance Measurement in Decentralized Organizations questions with answers.

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Chapter 11 Performance Measurement in Decentralized Organizations questions with answers.

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Chapter 11 Performance Measurement in
Decentralized Organizations questions
with answers.
Decentralized organization ANS -Decision-making authority is spread throughout the organization
rather than being confined to a few top executives



Major advantages of decentralization: ANS -1. Top management can focus on bigger issues

2. Lower-level managers are more knowledgeable about day-to-day operations

3. Organizations respond quickly to customers and changes in the operating environment

4. Train lower-level managers for higher-level positions

5. Increase motivation and job satisfaction



Major disadvantages of decentralization: ANS -1. Decisions do not follow company's overall strategy

2. If decisions are made independently, coordination may be lacking

3. Lower-level manager's objectives clash with objectives of the entire organization

4. Hard to spread innovative ideas



Decentralized organizations need _____ that link lower-level mangers' decision-making authority with
accountability for the outcomes of those decisions. ANS -Responsibility accounting systems



Responsibility center ANS -Any business segment whose manager has control over and is accountable
for costs, revenues, or investments in operating assets



The three primary types of responsibility centers: ANS -1. Cost centers

2. Profit centers

3. Investment centers

, Cost center ANS -A business segment whose manager has control over cost but has no control over
revenue or investments in operating assets.

Purpose: To minimize costs while providing the level of products and service demanded by other parts
of the organization.

Measured by: standard cost variance and flexible budget variances

Examples: Accounting, financing, general administration, legal, personnel, and manufacturing facilities



Profit center ANS -A business segment whose manager has control over cost and revenue but has not
control over investments in operating assets.

Measured by: comparing actual profit to targeted profit or budgeted profit



Investment center ANS -A business segment who manager has control over cost, revenue, and
investments in operating assets.

Purpose: To earn an adequate return on invesmtent

Measured by: return on investment or residual income measures



Two methods for evaluating an investment center's performance ANS -Return on investment (ROI) and
residual income



Formula for Return on investment (ROI) ANS -(Net operating income/Average operating assets)

*Higher the ROI, the greater the profit earned per dollar invested in the segment's operating assets

Used as the key measure of investment center performance



Net operating income ANS -Income before interest and taxes and is sometimes referred to as EBIT
(earnings before interest and taxes)



Operating assets ANS -Cash, accounts receivable, inventory, plant and equipment, and all other assets
held for operating purposes.

Does not include: land held for future use, an investment in another company, or a building rented to
someone else

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