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Acct 2102 Chapter 10

Decentralize
To divide operations into segments and delegate decision making responsibilities to the segment managers.
Product lines, geographic regions, and responsibility centers
What lines are companies decentralized along
Top management
An advantage of decentralization to _____ is that it doesn’t have to make daily operational decisions and can focus on strategic planning and decision making
Specialized Knowledge
An advantage of decentralization among Segment managers that are able to bring _____ _____ of operations to the table.
Quickly Respond
An advantage of decentralization among segment managers is that they can ___ ____ to customer demands. This leads improved customer relations.
Experience and Training
An advantage of decentralization among segment managers the _____ and _____ necessary to move into top management posititions
Motivation and retention
An advantage of decentralization among segment managers improves _____ and the ______ of segment managers
Duplication of costs and efforts
Potential disadvantages of decentralization include operational decisions are made at multiple levels within the company, the potential for the ____ __ ____ and ____ ___ to exist
Goal Congruence
Potential disadvantages of decentralization include ____ ____ may not be acheived
Responsibility Centers
These are segments of a company for which the manager is held responsible for certain activities.
cost center, profit center, revenue center, investment center
What are the four types of responsibility centers
Cost Centers
held responsible for CONTROLLING COSTS. PERFORMANCE REPORTS are used to evaluate
Revenue Centers
held responsible for GENERATING REVENUE. PERFORMANCE REPORTS are used to evaluate
Investment Center-
is held responsible for GENERATING REVENUE, CONTROLLING COSTS, and EFFICIENTLY MANANGE SEGMENT ASSETS. PERFORMANCE REPORTS., RETURN ON INVESTIMENT, AND RESIDUAL INCOME are used to evaluate.
Performance Reports
This report compares the actual operating results to the budget operating results
Variance
Difference between the actual and budget
Favorable Variance
This indicates that actual REVENUE was HIGHER than expected or actual EXPENSES LOWER than expected.
Unfavorable Variance
This indicates that actual REVENUE was LOWER than expected or actual EXPENSES were HIGHER than expected.
Management by exception
provide an explanations for all material variance.
Material Variance
This variance falls outside of an acceptable range of outcomes and its opposite does not require an explanation
Segment Margin
This is the contribution margin attributable to the segment less all traceable fixed costs
Traceable fixed costs
These costs will not be incurred if a segment no longer exists
Common fixed costs
These are not included in the segment margin calculation because they will continue even if a segment no longer exists
investment centers
Managers of this center are responsible for efficiently managing the segments assets. Assess the operating income generated by a segment in relationship to the assets invested in the segment
Return on investment
measures the amount of income an investment center earns relative to the amount of assets invested in the investment center.
ROI formula
operating income/total assets
Return on investment
This tells how much is income generated for every dollar invested in the segment
Sales Margin
Tells management how much income is generated from every sales dollar generated
Sales Margin formula
operating income/sales
Capital turnover
This tells management how much sales revenue is generated from every dollar invested in the segment
Capital turnover formula
sales revenue/total assets
Residual Income
determines whether the division has created any income above management’s expectations
Target Rate of Return
minimum acceptable rate of return that the company expects its segments to ear.
Residual Income formula
Operating income-(target rate of return*total assets)
Positive Residual Income
The company attains this when the segments ROI is greater than the company’s target rate of return
Negative Residual Income
This type of income happens when the segments ROI is less than the company s target rate of return
Residual income
Goal congruence is maximized by this because the company’s target rate of return is clearly communicated to the segment manager and used in the performance evaluation process
Static/Master Budgets
are used for planning and performance evaluation and is prepared for a single level of activity
flexible budgets
By using these managers gain better insight when planning for the future and evaluating past performance
Flexible budgets
These budgets are used to compare actual operating results to a budget created using the actual level of activity for the period
Flexible budget variance
is the difference between the flexible budget and the actual results
Can provide meaningful insight into operating successes and failures
Volume Variance
This is the difference between the flexible budget and the master budget and only exists because the company sold more or less units than they originally anticipated
NO
Should only unfavorable variances be investigated? _____, favorable variances should be investigated to make sure they are not hurting the business in the long run.
Expanded ROI formula
Sales margin x capital turnover

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