Performance Evaluation for
Decentralized Operations
CHAPTER 14
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Learning Objectives
After studying this chapter, you should be able to:
• Describe the advantages and disadvantages of
decentralized operations
• Prepare a responsibility accounting report for a cost
center
• Prepare a responsibility accounting report for a profit
center
• Compute and interpret the rate of return on
investment, the residual income, and the balanced
scorecard for an investment center
• Describe and illustrate how the market price,
negotiated price, and cost price approaches to
transfer pricing may be used by decentralized
segments of a business
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Learning Objective 1
Describe the advantages and
disadvantages of decentralized operations
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Centralized and Decentralized
Operations
• ___________ business – all major planning and
operating decisions are made by top
management
• ___________ business – separating a business
into divisions and delegating responsibility to
unit managers
• Divisions are structured around common
functions, products, customers, or regions
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Decentralization
• Advantages of Decentralization
• Delegating authority to unit managers:
• __________________________________
• __________________________________
• __________________________________
• Disadvantages of Decentralization
• ________________________________________
• ________________________________________
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Responsibility Accounting in
Decentralized Operations
• Responsibility accounting is the process of
_________________________________________
• A responsibility center is the __________________
________________________________
Types of Responsibility Centers
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Learning Objective 2
Prepare a responsibility accounting
report for a cost center
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Responsibility Accounting for Cost
Centers
• Unit manager has responsibility and authority for
_______
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Responsibility Accounting for Cost Centers
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Learning Objective 3
Prepare a responsibility accounting
report for a profit center
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Responsibility Accounting for Profit
Centers
• Unit manager has the responsibility and authority for
____________ and ____________
• Focus is on _______ revenues and expenses
• We’ll illustrate profit center income reporting for the
Tadpole Inc.
Tadpole Inc. has two profit centers
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Service Departments
• In addition to direct expenses, divisions may
also have expenses for services provided by
centralized service departments
• Examples include:
•
•
•
•
Research and Development
Purchasing
___________
___________
• A profit center’s income needs to reflect the
__________________
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Tadpole Inc., uses services provided by the
Payroll Accounting service department
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Allocating Service Charges
• An _______ for each service department is used
to charge service department expenses to profit
centers
• The activity bases for the centralized services
Tadpole Inc., are as follows:
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Allocating Service Charges
• Tadpole Inc., service usages:
• Service department charge rates determine how much to
allocate to each division
Service Department Charge Rate =
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Allocating Service Charges
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Divisional Income Statements
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Learning Objective 4
Compute and interpret the rate of return
on investment, the residual income, and
the balanced scorecard for an investment
center
©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part.
Responsibility Accounting for
Investment Centers
• Unit manager has responsibility and authority for
__________, __________, and ____________
• Income from operations is important, but so is
the ___________ and __________ income
• We’ll use In-Touch Inc., a cellular phone
company, to illustrate the accounting for
investment centers
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Responsibility Accounting for
Investment Centers
• In-Touch has three investment centers
• The Central Division seems to be the most
profitable
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Rate of Return on Investment (ROI)
• Measures profitability in terms of __________
ROI =
Income from Operations
Invested Assets
• The ____________ is the least profitable when using ROI as the
measure of profitability
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DuPont Formula
• An expanded ROI formula using two factors:
• ____________
• ____________
• ROI can be improved by ______ the profit
margin or investment turnover
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DuPont Formula
Rate of return on Investment =
×
• This method allows for greater analysis by separating
profitability and investment turnover
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DuPont Formula
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Residual Income
• Excess of ___________ over a minimum
acceptable income from operations
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In-Touch’s Residual Income
• Assuming a 10% minimum acceptable rate of
return
• The Northern Division has the _______
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_______________
• Uses financial and nonfinancial data to evaluate
a division
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Learning Objective 5
Describe and illustrate how the market
price, negotiated price, and cost price
approaches to transfer pricing may be
used by decentralized segments of a
business
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Transfer Pricing
• Price assigned when a good or service is
transferred from ________ to another within a
company
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Three Transfer Pricing Approaches
• ______________ Approach
• Transfer price is the price at which the product or
service transferred could be sold to outside buyers
• ______________ Approach
• Allows managers of decentralized units to negotiate
among themselves as to the transfer price
• Must be less than market price, but more than the
variable cost per unit
• ______________ Approach
• Cost is used to set transfer price
• Can use actual product cost, variable costs, or
standards costs
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End of Chapter 14
©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part.