Week 13 - Decentralization and Financial Control
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What is meant by financial control?
This involves the use of measures based on financial information to assess organization and management performance.
What is internal financial control?
When managers apply financial control tools to evaluate organization units for internal reasons.
What is decentralization?
The process of delegating decision-making authority to front-line decision makers.
What is a responsibility center?
An organization unit for which a manager is held accountable.
What are the four types of responsibility centers?
- 1. Cost centers
- 2. Revenue centers
- 3. Profit centers
- 4. Investment centers
What is a cost center?
They are responsibility centers in which employees control costs but do not control revenues or investment levels.
What are revenue centers?
They are responsibility centers whose members control revenues but do not control either the manufacturing or the acquisition cost of the product or service they sell or the level of investment made in the responsibility center.
What are profit centers?
They are responsibility centers in which managers and other employees control both the revenues and the costs of the products or services they deliver.
What are investment centers?
They are responsibility centers in which the managers and other employees control revenues, costs, and the level of investment.
What is the controllability principle?
It states that they manager of a responsibility center should be assigned responsibility only for the revenues, costs, or investments responsibility center personnel control.
What is a segment margin report?
- It's a report divided into responsibility centers.
- Each column is devoted to a profit center.
What are the most popular sources of comparative information for segment margin reports?
- Past performance - Is the performance this period reasonable, given past experience?
- Comparable organizations - How does performance compare with similar organizations?
What is return on investment?
- It's the ratio of income to investment.
What is return on equity?
What is return on assets?
What is productivity?
- It reflects the ability to generate sales for a given level of assets.
- Divides an output measure by an input measure.
What is residual income?
- Equals reported accounting income less the economic cost of the investment used to generate that income.
- Residual income = Income - Cost of capital
What is the economic value added tool (EVA)?
- Refinement of the residual income idea.
- Adjusts reported accounting income and asset levels for what many consider the biasing effects on current results of the financial accounting doctrine of conservatism.
What is the sales margin?
- It is the ratio of operating income to sales.
- AKA Return on sales (ROS)
What is asset turnover?
- It is the ratio of sales to assets.
What is turnover?
- The ratio of sales to investments.
In a segment margin report, what does contribution margin represent?
Immediate (i.e., short-term) pre-tax income effect of eliminating the segment.
In a segment margin report, what does segment margin represent?
The stand-alone profit of each segment (i.e., the financial effect on the organization if the segment is eliminated after the fixed capacity used by the segment is either redeployed or sold off).
In the segment margin report, what does the segment income represent?
The long-term effect on corporate income after corporate-level fixed capacity resources are allowed to adjust.
In the segment margin report, what can be considered unallocated costs?
- Allocated unavoidable corporate (i.e., "shutdown") costs
- They can't be allocated to any single segment.
What is the ordering of items on the Segment Margin Report?
- 1. Revenue
- 2. -Variable costs
- 3. Contribution Margin
- 4. -Other direct/traceable costs
- 5. Segment margin
- 6. -Allocated avoidable costs
- 7. Segment income
- 8. -Unallocated costs
- 9. Company-level profit
What reasons might products not be considered truly relative on the segment margin report?
Segments may have demand effects on other products/segments.
What could be uncertain about the investment base in performance measures?
- When the investment is established.
- How the investments are measured (i.e., assets)
Sales Margin is considered what kind of financial performance measure?
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