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
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
