Survey of accounting 6e chapter 14

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
• Centralized business – all major planning and
operating decisions are made by
______________.
• Decentralized business – separating a business
into divisions and delegating responsibility to
______________.
• 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
measuring/reporting operating data by responsibility center.
• A responsibility center is the area for which a unit manager
is responsible.

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
Exhibit 2: Cost Centers in a University

Unit manager only
has responsibility
and authority for
controlling _____.

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Responsibility Accounting for Cost Centers
Exhibit 3: Responsibility Accounting Reports 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 controlling _____ 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:
• _____________
• _____________
• _____________
• _____________
• A profit center’s income needs to reflect the ____
for any such services used.
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Tadpole Inc., uses services provided by the
Payroll Accounting service department
Exhibit 4: Payroll Accounting Department Charges to Tadpole Inc.’s Theme Park
and Photography Divisions

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Allocating Service Charges
•

An _______ base for each service department is used to charge
service department expenses to ______ centers.

•

The ______ 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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Service Department Allocations
Exhibit 5: Service Department Charges to Tadpole Inc. Divisions

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Divisional Income Statements
Exhibit 6: Divisional Income Statements— Tadpole Inc.

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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

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Responsibility Accounting for
Investment Centers
• Unit manager has responsibility and authority for
controlling _____, ___________, and managing
the ____________ in the center.
• Income from operations is important, but so is
the rate of return on investment and residual
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.
Exhibit 7: Divisional Income Statements— In-Touch Inc.

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Rate of Return on Investment
(ROI)
•

Measures __________ in terms of __________.
ROI =

•

Income from Operations
Invested Assets

The Central Division is the least profitable when using ROI as the
measure of ________.
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The DuPont Formula

• An expanded ROI formula using two factors:
• Ratio of ______________ to _____ (often called the
profit margin).
• Ratio of ______ to ____________ (often called the
investment turnover).

• ROI can be improved by increasing the profit
margin or investment turnover.

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The DuPont Formula
ROI =

×

The ending result will be the same as the more basic
ROI formula. But, this method allows for greater
analysis by separating __________ and __________.

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Using DuPont Formula to
Analyze In-Touch Divisions
Margin

Turnover

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Residual Income
•

Excess of income from operations over a minimum acceptable
income from operations.

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