ACCT 2020 1st Edition Lecture 18 Outline of Last Lecture I Computing Variances II Breaking Down Spending Variances III Fixed Manufacturing Overhead Variances Outline of Current Lecture I Decentralization in Organizations II Cost Profit Investment Centers III Return on Investment IV Residual Income V Delivery Performance Measures VI Balanced Scorecard Current Lecture I Decentralization in Organizations Talking about companies that are decentralized when the CEO does not make all of the decisions Usually lower level managers Benefits o Top management freed to concentrate on strategy o Lower level managers Can respond quickly to customers These notes represent a detailed interpretation of the professor s lecture GradeBuddy is best Used as a supplement to your own notes not as a substitute Gain experience in decision making Often based on better information o Decision making authority leads to job satisfaction Disadvantages o Lower level managers may make decisions without seeing the big picture might be just focusing on individual department or segment o May be a lack of coordination among autonomous managers For example a time when Sony had managers competing against each other to sell the most products and waste time o Lower level managers objectives may not be those of the organization o May be difficult to spread innovative ideas in the organization o Mostly can be solved by helping managers see the big picture and have monthly meetings among departments and help them determine how to be on tract II Cost Profit Investment Centers Cost Center o A segment whose manager has control over cots but not over revenues or investment funds They only have control on costs because they are not bringing in any revenue Law team administration etc Profit Center o A segment whose manager has control over both costs and revenues but not control over investment funds An example would be the cafeteria in a corporate building revenue from the lunches and cost associated Investment Center o A segment whose manger has control over costs revenues and investments in operating assets This manager could be responsible for all 3 of these responsibilities III Return on Investment IV Formulas o ROI Net operating income Average operating assets o Margin Net operating income x Turnover Sales Sales Average operating assets o So ROI MARGIN x TURNOVER Criticisms o Managers often inherit many committed costs over which they have no control o Managers evaluated n ROI may reject profitable investment opportunities Residual Income V Formula o RI Net Operating Income Average operating assets x Min rate of return o If net operating income is greater than the part in parentheses we WILL have residual income ROI measures net operating income in percentages while Residual income provides a dollar amount Benefits o Residual Income is preferred over ROI sometimes as it might encourage investment that at least meets their minimum required return Disadvantages o Residual income is just a dollar amount while ROI is just a percentage It s hard to evaluate departments of different sizes The best systems take several financial evaluations in mind when evaluating managers Delivery Performance Measures Delivery cycle time is the whole time when the goods are ordered till the goods are shipped Throughput Time includes process time inspection time move time and queue time o Process time is the only value added time Only time increasing the value for the customer the company should try to decrease all wait times to improve efficiency Manufacturing cycle Efficiency Value Added Time process time Manufacturing cycle time throughput time VI Balanced Scorecard Management translates its strategy into performance measures that employees understand and influenced Financial has about financial performance improved Customer do customers recognize that we are delivering more value Performance measures Internal business processes have we improved key business processes so that we can deliver more value to the customers Learning and Growth Are we maintaining our ability to change and improve The balances scorecard relies on non financial measures in addition to financial measures o Financial measures are lag indicators that summarize the results of past actions Non financial measures are leading indicators of future financial performance They can be misleading due to the lack of customer satisfaction measurements o Top managers are ordinarily responsible for financial performance measures NOT lower level managers Non financial measures are more likely to be understood and controlled by lower level managers For example customer service repetitive have little control over ROI so can evaluate on different terms Balanced scored should have measures that have a cause and effect link If we improve one measure than another should improve Incentive compensation should be linked to balanced scorecard performance measures