Chapter 22
Decentralization &
Performance Evaluation
Departmental Accounting – giving managers more
effective control over smaller area.
Primary
goals
Provide information
for managers to use
in performance
evaluation.
Assign costs to
managers who are
responsible for
controlling the costs.
Balanced Scorecard
(Decision Insight – pg 889)
• Contains financial and non-financial performance
measures.
• Tracks progress toward company goals.
• Balances long-run and short-run objectives.
• Links performance to goals.
Four Perspectives of Performance
• The balanced scorecard contains information
from four key viewpoints.
 Financial - financial measures of profitability or growth
 Customer - measures of satisfaction, market share, etc.
 Internal Business Process - what process are we trying
to improve
 Learning and Growth - what is needed to support
other goals
Follow the flow!!!
• Increases in Learning and Growth
• Lead to improvements in Internal Processes
• Which enable us to meet Customer needs.
• Which in turn, leads to Financial success
For Each Perspective...
• We develop
 objectives
 measures of performance to track progress
 target levels of performance
• At the end of the period we report
 actual performance to monitor
progress/success
• items are strategy specific
Responsibility Accounting
• Another idea that is important in evaluating
performance is the notion of responsibility. We
assign responsibility for actions to the
appropriate levels in the organization and then
gather data to evaluate their performance
against the goals identified early on.
Types of Responsibility Centers
• This author identifies two types of responsibility
centers.
 Cost Center – accountable for controllable costs
only because it does not generate revenues
 Profit Center – manager is accountable for both
revenues and expenses incurred. (individual store in
a chain, or department in a store)
• Other types of responsibility centers
 Discretionary Cost Centers
 Revenue Centers
 Investment Centers
Performance Evaluation
• These responsibility centers will be evaluated, using
both financial and nonfinancial measures, on how well
they meet the goals of the center (controlling costs,
generating operating profit, etc.)
• Managers of these various centers should not be held
accountable for costs or revenues that are not under
their control.
• We typically compare actual results to a flexible budget
for the center.
Allocating Department Expenses
• Allocating expenses across multiple departments
is an accounting challenge:
 Direct Expenses – incurred for the sole benefit of
one department
 Indirect Expenses are
• Incurred for the benefit >1 department
• Allocated across multiple departments who receive the
benefits based upon
 Cause – effect relationship
 Estimates approximating the benefit received by each department
• There is no standard rule for allocating indirect
expenses; judgment is required.
Common Bases for Allocating Indirect Expenses
Service Department Costs
Question
ABCO allocates its $300,000 personnel cost to operating
departments based on the number of employees in each
department. The assembly department has 100
employees and the packing department has 150
employees. What amount of cost is allocated to
assembly?
a. $100,000
b. $120,000
c. $150,000
d. $180,000
Service Department Costs
Question
ABCO allocates its $300,000 personnel cost to
operating departments based on the number of
employees in each department. The assembly
department has 100 employees and the packing
department has 150 employees. What amount of cost is
allocated to assembly?
a. $100,000
Assembly percentage
= 100 ÷ (100 + 150) = 40%
b. $120,000
40% of $300,000 = $120,000
c. $150,000
d. $180,000
Departmental Income Stmts
Combined
$ 88,000
38,000
$ 50,000
Sales
Cost of goods sold
Gross profit on sales
Operating expenses
Salaries
$
Supplies
Rent
Utilities
Service Department One
Service Department Two
Total operating expenses
$
Net income
$
17,000
1,100
8,000
800
2,200
3,400
32,500
17,500
Sales
Sales
Dept. One Dept. Two
$ 40,000 $ 48,000
20,000
18,000
$ 20,000 $ 30,000
$
6,000
400
3,000
300
1,000
1,400
$ 12,100
$ 7,900
$ 11,000
700
5,000
500
1,200
2,000
$ 20,400
$
9,600
Departmental Contribution
to Overhead
Departmental revenue
– Direct expenses
= Departmental contribution
Departmental contribution . . .
 Is used to evaluate departmental performance.
 Is not a function of arbitrary allocations of indirect
expenses.
A department may be eliminated when its
departmental contribution is negative.
Departmental Contribution
to Overhead
Net income for the
company is still
$17,500.
Departmental Contribution
to Overhead
Departmental contributions to indirect
expenses (overhead) are emphasized.
Departmental Contribution
to Overhead
Departmental contributions are positive so
neither department is a candidate for
elimination.
Controllable Costs
Costs are controllable
if the manager
has the power to
determine, or strongly
influence, the amounts
incurred.
A manager’s
performance evaluation
should be based on
controllable costs.
Distinguishing Controllable
and Direct Costs
Direct costs are traced to
departments, but may not be
controllable by the department
manager.
• Example: Department managers
usually have no control over their
own salaries.
Controllable costs are identified with
a particular manager and a definite
time period.
• All costs are controllable at some
level of management if the time
period is long enough.
Investment Center Evaluation
• Investment center – is like a profit center except the manager
is also responsible for effectively using the center’s assets to
generate income (division of a company)
• Several measures used to evaluate an investment center.
 ROI = Operating income/Avg total assets
 Or Profit margin x asset turnover where
 Profit margin = operating income/sales
 Asset turnover = sales/avg total assets
• May be used to compare performance across divisions, to
establish targets for employee evaluation, or to determine
whether to reinvest resources in center
That’s the last lecture!