bg management accounting chapter 8 4075

CHAPTER 8.1 Decentralization in Organizations Lower-level managers gain experience in decision-making Lower-level decision often based on better information 8.1 Decentralization in Organizations May be a lack of coordination among autonomous managers Lower-level manager’s objectives may not be those of the organization Lower-level managers may make decisions without seeing the “big picture.” May be difficult to spread innovative ideas in the organization 8.2 Responsibility Accounting • Based on Charles T Horngren • Based on Anthony and Reece 8.2 Responsibility Accounting 8.2 Responsibility Accounting Responsibility center is any part of an organization whose manager has control over and is accountable for cost, profit, or investments Cost, Profit, and Investments Centers Cost, Profit, and Investments Centers 8.3 Evaluating Responsibility Performance 8.3.1 Evaluating cost center A cost variance is the difference between the actual amount of the cost and how much a cost should have been, given the actual level of activity - If the actual cost is greater than what the cost should have been, the variance is labeled as unfavorable - If the actual cost is less than what the cost should have been, the variance is labeled as favorable 8.3 Evaluating Responsibility Performance 8.3.2 Evaluating profit center A profit variance is the difference between the actual total profit and what the total profit should have been, given the actual level of activity for the period - If actual revenue exceeds what the revenue should have been, the variance is labeled favorable - If actual revenue is less than what the revenue should have been, the variance is labeled unfavorable 8.3 Evaluating Responsibility Performance 8.3.3 Evaluating investment center An investment center is responsible for earning an adequate return on investment The following two sections present two methods for evaluating this aspect of an investment center’s performance - The first method, is called return on investment (ROI) - The second method, is called residual income (RI) Return on Investment (ROI) Formula Net operating income ROI = Average operating assets Residual Income - Another Measure of Performance This computation differs from ROI ROI measures net operating income earned relative to the investment in average operating assets Residual income measures net operating income earned less the minimum required return on average operating assets  ... ideas in the organization 8. 2 Responsibility Accounting • Based on Charles T Horngren • Based on Anthony and Reece 8. 2 Responsibility Accounting 8. 2 Responsibility Accounting Responsibility center.. .8. 1 Decentralization in Organizations Lower-level managers gain experience in decision-making Lower-level decision often based on better information 8. 1 Decentralization... Cost, Profit, and Investments Centers Cost, Profit, and Investments Centers 8. 3 Evaluating Responsibility Performance 8. 3.1 Evaluating cost center A cost variance is the difference between the