Survey of accounting 6e chapter 14

Performance Evaluation for Decentralized Operations Chapter 14 ©2013 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part 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 ©2013 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part Learning Objective Describe the advantages and disadvantages of decentralized operations ©2013 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part 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 ©2013 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part Decentralization • Advantages of Decentralization • Delegating authority to unit managers: • • • • Disadvantages of Decentralization • • ©2013 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part 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 ©2013 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part Learning Objective Prepare a responsibility accounting report for a cost center ©2013 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part Responsibility Accounting for Cost Centers Exhibit 2: Cost Centers in a University Unit manager only has responsibility and authority for controlling _ ©2013 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part Responsibility Accounting for Cost Centers Exhibit 3: Responsibility Accounting Reports for Cost Centers ©2013 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part Learning Objective Prepare a responsibility accounting report for a profit center ©2013 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part Divisional Income Statements Exhibit 6: Divisional Income Statements— Tadpole Inc ©2013 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part Learning Objective Compute and interpret the rate of return on investment, the residual income, and the balanced scorecard for an investment center ©2013 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part 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 ©2013 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part 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 ©2013 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part 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 ©2013 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part 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 ©2013 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part 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 ©2013 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part Using DuPont Formula to Analyze In-Touch Divisions Margin Turnover ©2013 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part Residual Income • Excess of income from operations over a minimum acceptable income from operations ©2013 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part In-Touch’s Residual Income • Assuming a 10% minimum acceptable rate of return • The Northern Division has the highest residual income ©2013 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part The Balanced Scorecard • Uses _ and _ data to evaluate a division Exhibit 8: The Balanced Scorecard ©2013 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part Learning Objective 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 ©2013 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part Transfer Pricing Exhibit 9: Commonly used Transfer Prices A transfer price is the price assigned when a _ or is transferred from to within a _ ©2013 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part Three Transfer Pricing Approaches • _ Approach • Transfer price is the price at which the product or service transferred could be sold to outside buyers • _ Approach • Allows managers of decentralized units to negotiate among themselves as to the transfer price • Must be less than market price, but more than the variable cost per unit • Approach • Cost is used to set transfer price • Can use actual product cost, variable costs, or standards costs ©2013 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part End of Chapter 14 ©2013 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part ... 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... 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. .. accessible website, in whole or in part Responsibility Accounting in Decentralized Operations • Responsibility accounting is the process of measuring/reporting operating data by responsibility