Decentralized organization Show
decision-making authority is spread throughout the organization rather than being confined to a few top executives Our of necessity all large organizations are? decentralized to some extent In strongly centralized organizations, decision-making authority is? reluctantly delegated to lower-level managers who have little freedom to make decisions In strongly decentralized organizations even the lowest-level managers are? empowered to make as many decisions as possible somewhere between these two extremes Advantages of decentralization 1. Top management can concentrate on bigger issues, such as overall strategy 2. Puts the decision-making authority in the hands of those who tend to have the most detailed and up-to-date info 3. Can respond more quickly to customers and changes in operating environment 4. Helps train lower-level managers for higher-level positions 5. Increase their motivation and job satisfaction Disadvantages of decentralization 1. Managers may make decisions without understanding the big picture 2. Making decisions independently will make coordination harder 3. Lower-level managers may have objectives that clash with the objectives of the entire organization 4. Spreading innovative ideas may be difficult in a decentralized organization Responsibility accounting systems that link lower-level managers' decision-making authority with accountability for the outcomes of those decisions The responsibility center is used for? any part of an organization whose manager has control over and is accountable for cost, profit, or investments What are the three primary types of responsibility centers? 1. Cost centers 2. Profit centers 3. Investments centers manager has control over costs, but not over revenue or the use of investment funds What service departments are classified as cost centers? Accounting, finance, general administration, legal, and personnel What is another cost center? The managers of cost centers are expected to? minimize costs while providing the level of products and services demanded by other parts of the organization What are used to evaluate cost center performance? 1. Standard cost variances 2. Flexible budget variances manager has control over both costs and revenue, bot not over the use of investment funds What are profit center managers evaluated by?
comparing actual profit to targeted or budgeted profit Manager has control over cost, revenue, and investments in operating assets What are investment center managers evaluated on? using return on investment or residual income measures An investment center is responsible for earning? an adequate return on investment Net operating income/Average operating assets The higher a business segment's return on investment the? greater the profit earned per dollar invested in the segment's operating assets Net operating income is used in the in the ROI formula NOT? Income before interest and taxes; referred to as earnings before interest and taxes 1. cash 2. accounts receivable 3. inventory 4. plant and equipment 5. all other assets held for operating purposes What are examples of assets that are not included in operating assets? 1. land held for future use 2. an investment in another company 3. building rented to someone else The operating assets base used in the formula is computed as the average of the operating assets between the? beginning and the end of the year net book value of depreciable assets to calculate average operating assets An asset's net book value decreases over time as the/ accumulated depreciation increases Using net book value in the in the calculation of average operating assets results in? a predictable pattern of increasing ROI over time as accumulated depreciation grows and discourages replacing old equipment with new updated equipment Most companies use net book value because it is? consistent with their financial reporting practices of recording the net book value of assets on the balance sheet and including depreciation as operating expense on the income statement Net operating income/Sales Sales/Average operating assets The margin and turnover formulation provides some? increasing selling prices, reducing operating expenses, or increasing unit sales Excessive funds tied up in operating assets depress? ROI is now widely used as the key measure of? investment center performance ROI reflects in a single figure many aspects of? the manager's responsibilities It can be compared to the? 1. returns of other investment centers in the organization 2. the returns of other companies in the industry 3. the past returns of the investment center itself 1. Just telling managers to increase ROI may not be enough; managers may not know how to increase ROI 2. A manager who takes over a business segment typically inherits many committed costs over which the manager has not control 3. A manager who is evaluate based on ROI may reject investment opportunities Residual income is another approach to measuring an? investment center's performance Residual income (definition) the net operating income that an investment center earns above the minimum required return on its operating assets Residual income (calculation) Net operating income-(Average operating assets X Minimum required rate of return) Economic value added is an adaptation of? residual income that has been adopted by many companies When residual income or EVA is used to measure performance, the objective is to? maximize the total amount of residual income or EVA, not to maximize ROI The residual income approach encourages managers to? make investments that are profitable for the entire company but that would be rejected by managers who are evaluated using the ROI formula A manager who is evaluated based on ROI will reject any project whose? rate of return is below the division's current ROI even if the rate of return on the project is above the company's minimum required rate of return Managers who are evaluated based on residual income will tend to make? better decisions concerning investment projects than managers who are evaluated based on ROI What is one disadvantage to residual income? it can't be used to compare the performance of divisions of different sizes Larger divisions often have more? residual income than smaller divisions; because they are bigger
When comparing investment centers it is probably better to focus on the percentage? change in residual income from year to year rather than on the absolute amount of the residual income Many organizations use a variety of? non financial performance measures in addition to financial measures What are three measures that are critical to success in many organizations? 1. delivery cycle time 2. throughput time 3. manufacturing cycle efficiency The amount of time from when a customer order is received to when the completed order is shipped Cutting the delivery cycle time may give a company a key? Throughput time (manufacturing cycle time) The amount of time required to turn raw materials into completed products The throughput time is made up of? 1. process time 2. inspection time 3. move time 4. queue time the amount of time work is actually done on the product the amount of time spent ensuring that the product is not defective The time required to move materials or partially completed products from workstation to workstation The amount a product spends waiting to be worked on, to be moved, to be inspected, or to be shipped What is the only activity that adds value to the product? The other three activities add no? value and should be eliminated as much as possible Throughput time is considered to be a key measure in? Manufacturing cycle efficiency Value-added time (process time)/Throughput time (manufacturing cycle) time Any non-value-added time results in an MCE of? Monitoring the MCE helps companies to reduce? non-value-added activities and thus get products into the hands of customers more quickly and at a lower cost Throughput time (calculation) Process time+Inspection time+move time+Queue time consists of an integrated set of performance measures that are derived from and support a company's strategy a theory about how to achieve the organization's goals Performance measures used in the balanced scorecard approach fall into 4 groups 1. financial 2. customer 3. internal business processes 4. learning and growth Internal business processes what the company does in an attempt to satisfy customers Learning is necessary to improve? internal business processes Improving business processes is necessary to? improve customer satisfaction Improving customer satisfaction is necessary to improve? improvement; not just attaining some specific objective such as profits In the balanced scorecard approach continual? improvement is encouraged lag indicators that report on the results of past actions Non financial measures of key success drivers such as? customer satisfaction are leading indicators of future financial performance Top-managers are responsible for the? financial performance measures; not lower-level managers The performance measures should be consistent with? The performance measures should be understandable and? controllable to a significant extent by those being evaluated Third, the scorecard should not have too many? The entire organization will have an overall balanced scorecard and individuals will have? his or her own personal scorecard as well Personal scorecards should consist of items the? individual can personally influence that relate directly to the performance measures on the overall balanced scorecard If the balanced scorecard is correctly constructed the performance measures should be? linked together on a cause-and-effect basis Incentive compensation for employees should be tied to? balanced scorecard performance measures Data about defects should be reported to the responsible managers atleast? once a day so that action can be quickly taken if an unusual number of defects occurs In most advanced companies, any defect is reported? immediately, and its cause is tracked down before any more defects occur Another common characteristic of the performance measures is that managers focus on? trends in the performance measures over time; emphasis on progress and improvement rather than on meeting any specific standard How are orders transmitted in a centralized organization?A centralized organization directs its authority from the top management down through hierarchical channels with only a few top managers in charge of overall decision making. This is known as the chain of command. A chain of command is an order through which authority is shared from top to bottom.
In which structure is the authority centralized to only one person like CEO or managing director?Hierarchical structure
Its chain of command is the one that likely comes to mind when you think of any company: Power flows from the board of directors down to the CEO through the rest of the company from top to bottom. This makes the hierarchical structure a centralized organizational structure.
What is a benefit of decentralized decision making in an organization quizlet?The primary advantage of decentralization is that managers at the lower levels of the organization are usually "closer to the action" and can make more informed and quicker decisions based on local information.
Which type of responsibility center manager is commonly evaluated using return on investment?Investment center managers are usually evaluated using return on investment (ROI) or residual income, as discussed later in this chapter.
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In centralized organizations lower-level managers are responsible only for implementing decisions
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