Responsibility Center

Responsibility Center

Decentralization in Organizations Benefits of  Decentralization

Top management freed to concentrate on strategy. Lower-level managers gain experience in decision-making. Decision-making

Lower-level decisions often based on  better information. information.

authority leads to  job satisfaction. satisfaction. Lower level managers can respond quickly to customers.

Decentralization in Organizations

Lower-level managers may make decisions  without seeing seeing the  big picture. picture. “

”

Lower-level manager s objectives may not  be those of the organi!ation. ’

ay be a lack of  coordination among autonomous managers.

Disadvantages of  Decentralization

ay be difficult to spread innovative ideas in the organi!ation.

Responsibility Center  A

responsibility center is an organization unit that is headed by a manager who is responsible for its activities to achieve certain objectives.  An organization is a collection of responsibility centers.  An organization achieves its goals only if its responsibility centers achieve their goals.

Cost, rofit, and !nvestments Centers

"ost "enter

Cost, profit, and investment centers are all "nown as responsibility  centers.

#rofit "enter

Responsibility Center

$nvestment "enter

Cost Center

 A segment whose manager has control over costs,  but not over revenues or investment funds.

rofit Center

 A segment whose manager has control over both costs and revenues,  but no control over investment funds.

%evenues &ales $nterest 'ther

"osts fg. costs "ommissions &alaries 'ther

!nvestment Center "orporate (eadquarters

 A segment whose manager has control over costs, revenues, and investments in operating assets.

Responsibility Centers $nvestment "enters O  e r a ti o n s ! ic e P r e s id e n t

S a lty S n a c k s Product M anger 

Beverages Product M anager 

S u  e r io r " o o d s C o r  o r a t io n C o r  o r a t e & e a d ' u a r te r s P r e s id e n t a n d C ( O

"inance C h i e f " #n a n c i a l O ffic e r  

$egal % e n e ra l C o u n s e l

Personnel ! ic e P r e s id e n t

Confections Product M anager 

"ost "enter s &uperior )oods "orporation provides an example of

B o t tlin g P la n t M anager 

W a re h o u s e M anager 

D i s t r i b u t io n M anager 

the various kinds of responsibility centers that exist in an organi!ation.

Responsibility Centers S u  e r io r " o o d s C o r  o r a t io n C o r  o r a t e & e a d ' u a r te r s P r e s id e n t a n d C ( O

O  e r a ti o n s ! ic e P r e s id e n t

S a lty S n a c k s Product M anger 

B o t tlin g P la n t M anager 

Beverages Product M anager 

W a re h o u s e M anager 

"inance C h i e f " #n a n c i a l O ffic e r  

$egal % e n e ra l C o u n s e l

Personnel ! ic e P r e s id e n t

Confections Product M anager 

D i s t r i b u t io n M anager 

#rofit "enters

&uperior )oods "orporation provides an example of the various kinds of responsibility centers that exist in an organi!ation.

Responsibility Centers S u  e r io r " o o d s C o r  o r a t io n C o r  o r a t e & e a d ' u a r te r s P r e s id e n t a n d C ( O

O  e r a ti o n s ! ic e P r e s id e n t

S a lty S n a c k s Product M anger 

B o t tlin g P la n t M anager 

Beverages Product M anager 

W a re h o u s e M anager 

"inance C h i e f " #n a n c i a l O ffic e r  

$egal % e n e ra l C o u n s e l

Personnel ! ic e P r e s id e n t

Confections Product M anager 

D i s t r i b u t io n M anager 

"ost "enters

&uperior )oods "orporation provides an example of the various kinds of responsibility centers that exist in an organi!ation.

Responsibility Center  A

responsibility center is an organization unit that is headed by a manager who is responsible for its activities to achieve certain objectives.  An organization is a collection of responsibility centers.  An organization achieves its goals only if its responsibility centers achieve their goals.

Responsibility Centers erformance

of a responsibility center is measured  by inputs or outputs #fficiency and effectiveness #fficiency is the ratio of output to input #ffectiveness is the relationship between output and its objectives.

$ypes of Responsibility Center #ngineered

#%pense Center &input in monetary, output in physical terms' Discretionary #%pense Center &input measure, monetary terms' Revenue Center &output measure, monetary terms' rofit Center &input and output measure, monetary terms' !nvestment Center

#%pense Centers (eneral   

control characteristics)

*udget preparations !ncremental budgeting +ero base budgeting

erformance

measurement

Discretionary #%pense Centers  Administrative  

Difficulty in measuring output (oal congruence

Research  

and upport Centers

and Development Centers

Difficult to relate output to input (oal congruence

-ar"eting

Centers

Divisionalization  A

functional vs. divisional organization $wo conditions for delegation process)  

ower level managers have access to relevant information. $here is a method to measure the effectiveness of decisions.

$he

trend of divisionalization started in /012s $he majority of large companies have more than one profit centers.

 Advantages of rofit Centers !mproved

decision 3uality  4aster operating decision ma"ing $op managers can focus on strategic issues -anagers are more empowered $raining ground for general management #nhanced profit consciousness #asy to measure performance

Disadvantages of rofit Centers $he

possibility of loss of control by top management $he decision 3uality may be reduced if top management is more capable than subordinates 4riction among profit centers  Additional costs &more staff, redundancies' Overemphasis on short5run profitability  (oal congruence problems

-anaging rofit Center *usiness   

roduct decisions -ar"eting decisions rocurement or sourcing decisions

Other   

6nits as profit centers have controls over)

profit centers)

-ar"eting -anufacturing ervice and support units

-easuring rofitability  -anagement

vs. economic performance -anagement performance measures)     

Contribution margin Direct profit Controllable profit !ncome before income ta% 7et income

Revenue

recognition problems

$ransfer rice $ransfer

price is the amount charged for goods or services transferred between responsibility centers. Objectives of transfer prices)    

rovide information on costs 8 revenues romote goal congruence 9elp measure economic performance imple and easy to implement

$ransfer ricing rinciples $ransfer

price should be similar to mar"et price. $wo decisions)  

ourcing &buy or ma"e' decision $ransfer price decision

!deal

situation)

(ood atmosphere   A mar"et price  4reedom to source  4ull information  7egotiation 

ossible $ransfer rices ossible    

mar"et prices)

ublished mar"et price *ids price elling price in the production profit center *uying price of the buying profit center

Cost5based  

Cost basis -ar"5up

transfer price

 Administration of $ransfer rice 7egotiation  Arbitration

and conflict resolution roduct classification

!nvestment center  A

special type of profit center 9as control over investment decision -easures of performance)   

Return on investment Residual income #conomic value added

-easuring Assets #mployed Cash Receivables !nventories  :or"ing

capital roperty, lant and #3uipment  Ac3uisition of new e3uipment  (ross boo" value  Disposition of assets   Annuity depreciation 

eased

assets !dle assets !ntangible assets 7oncurrent liabilities Capital charge

RO! vs. #;A  RO!

< rofit = investment Residual income < income > &capital ? capital charge' #;A < 7et profit > capital charge

Return on !nvestment &RO!' 4ormula $ncome $ncomebefore beforeinterest interest and andtaxes taxes+,$T +,$T

Net operating income ROI = Average operating assets

"ash* "ash*accounts accountsreceivable* receivable*inventory* inventory* plant plantand andequipment* equipment*and andother other productive productiveassets. assets.

Calculating Residual !ncome )esidual + inco*e

,et oerating inco*e

.verage oerating assets

(

Mini*u* re'uired rate of return

)

This computation differs from %'$. %'$ measures net operating income earned relative to the investment in average operating assets. %esidual income measures net operating income earned less the minimum required return on average operating assets.

#conomic ;alue Added &#;A' #;A

is a specific type of residual income calculation that has recently gained popularity.

 :eighted

average cost of capital e3uals the after5 ta% average cost of all long5term funds in use.

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