Chapter 11
Performance Measurement in Decentralized
Organizations
Solutions to Questions
11-1 In a decentralized organization, lower-level managers, top management can
decision-making authority isn’t confined to a few concentrate on bigger issues such as overall
top executives; instead, decision-making strategy; (2) empowering lower-level managers
authority is spread throughout the organization. to make decisions puts decision-making
authority in the hands of those who have the
11-2 The benefits of decentralization include: most up-to-date information about day-to-day
(1) by delegating day-to-day problem solving to operations; (3) by eliminating layers of decision-
© McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent
of McGraw Hill LLC.
Managerial Accounting 18th Edition, Solutions Manual, Chapter 11 95
,making and approvals, organizations can income approach avoids this problem because
respond more quickly to customers and to any project whose rate of return exceeds the
changes in the operating environment; (4) company’s minimum required rate of return will
granting decision-making authority helps train result in an increase in residual income.
lower-level managers for higher-level positions;
and (5) empowering lower-level managers to 11-7 A transfer price is the price charged
make decisions can increase their motivation when one responsibility center within a company
and job satisfaction. provides goods or services to another
responsibility center in the same company.
11-3 The manager of a cost center has
control over cost, but not revenue or the use of 11-8 Suboptimization occurs when
investment funds. A profit center manager has responsibility center managers forgo additional
control over both cost and revenue. An companywide profits by making decisions that
investment center manager has control over are not in the best interests of the overall
cost and revenue and the use of investment company or even in the best interests of their
funds. own responsibility center.
11-4 Margin is the ratio of net operating 11-9 A service department’s budgeted costs,
income to total sales. Turnover is the ratio of rather than its actual costs, should be charged
total sales to average operating assets. The to operating departments. This prohibits a
product of the two numbers is the ROI. service department from passing on cost
overruns to operating departments.
11-5 Residual income is the net operating
income an investment center earns above the 11-10 Sales dollars are often a very poor base
company’s minimum required rate of return on for allocating costs because sales dollars vary
operating assets. from period to period, whereas the costs are
often largely fixed. Therefore, a letup in sales
11-6 If ROI is used to evaluate performance, effort in one department will shift allocated costs
investment center managers may reject from that department to other, more successful
profitable investment opportunities whose rate departments. In effect, the departments putting
of return exceeds the company’s required rate of forth the best sales efforts are penalized in the
return but whose rate of return is less than the form of higher cost allocations.
investment center’s current ROI. The residual
© The McGraw-Hill Companies, Inc., 2018. All rights reserved.
96 Managerial Accounting, 16th Edition
,Chapter 11: Applying Excel
The completed worksheet is shown below.
Copyright © 2024 McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw Hill LLC.
Managerial Accounting 18th Edition, Solutions Manual, Chapter 11 97
, Chapter 11: Applying Excel (continued)
The completed worksheet, with formulas displayed, is shown below.
Copyright © 2024 McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw Hill LLC.
Managerial Accounting 18th Edition, Solutions Manual, Chapter 11
Performance Measurement in Decentralized
Organizations
Solutions to Questions
11-1 In a decentralized organization, lower-level managers, top management can
decision-making authority isn’t confined to a few concentrate on bigger issues such as overall
top executives; instead, decision-making strategy; (2) empowering lower-level managers
authority is spread throughout the organization. to make decisions puts decision-making
authority in the hands of those who have the
11-2 The benefits of decentralization include: most up-to-date information about day-to-day
(1) by delegating day-to-day problem solving to operations; (3) by eliminating layers of decision-
© McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent
of McGraw Hill LLC.
Managerial Accounting 18th Edition, Solutions Manual, Chapter 11 95
,making and approvals, organizations can income approach avoids this problem because
respond more quickly to customers and to any project whose rate of return exceeds the
changes in the operating environment; (4) company’s minimum required rate of return will
granting decision-making authority helps train result in an increase in residual income.
lower-level managers for higher-level positions;
and (5) empowering lower-level managers to 11-7 A transfer price is the price charged
make decisions can increase their motivation when one responsibility center within a company
and job satisfaction. provides goods or services to another
responsibility center in the same company.
11-3 The manager of a cost center has
control over cost, but not revenue or the use of 11-8 Suboptimization occurs when
investment funds. A profit center manager has responsibility center managers forgo additional
control over both cost and revenue. An companywide profits by making decisions that
investment center manager has control over are not in the best interests of the overall
cost and revenue and the use of investment company or even in the best interests of their
funds. own responsibility center.
11-4 Margin is the ratio of net operating 11-9 A service department’s budgeted costs,
income to total sales. Turnover is the ratio of rather than its actual costs, should be charged
total sales to average operating assets. The to operating departments. This prohibits a
product of the two numbers is the ROI. service department from passing on cost
overruns to operating departments.
11-5 Residual income is the net operating
income an investment center earns above the 11-10 Sales dollars are often a very poor base
company’s minimum required rate of return on for allocating costs because sales dollars vary
operating assets. from period to period, whereas the costs are
often largely fixed. Therefore, a letup in sales
11-6 If ROI is used to evaluate performance, effort in one department will shift allocated costs
investment center managers may reject from that department to other, more successful
profitable investment opportunities whose rate departments. In effect, the departments putting
of return exceeds the company’s required rate of forth the best sales efforts are penalized in the
return but whose rate of return is less than the form of higher cost allocations.
investment center’s current ROI. The residual
© The McGraw-Hill Companies, Inc., 2018. All rights reserved.
96 Managerial Accounting, 16th Edition
,Chapter 11: Applying Excel
The completed worksheet is shown below.
Copyright © 2024 McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw Hill LLC.
Managerial Accounting 18th Edition, Solutions Manual, Chapter 11 97
, Chapter 11: Applying Excel (continued)
The completed worksheet, with formulas displayed, is shown below.
Copyright © 2024 McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw Hill LLC.
Managerial Accounting 18th Edition, Solutions Manual, Chapter 11
