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Ebook Theory and problems of managerial accounting (2nd edition): Part 2

(BQ) Part 2 book "Theory and problems of managerial accounting" has contents: Standard costs; responsibility accounting and cost allocation; performance evaluation; transfer pricing and decentralization; capital budgeting; quantitative approaches to managerial accounting; financial statement analysis and statement of changes in financial position;and other contents. | Perform ance Evaluation, Transfer Pricing, and Decentra l zati on i DECE~ALIZATION As organizations grow, operations tend to increase in both volume and scope, and they are divided among a larger number of subunits such as divisions and centers As a result, more of the freedom to make decisions is assigned to those subunits Decentralization is the delegation of decision making to the subunits of an organization. It is a matter of degree. The lower the level where decisions are made, the greater i the decentralization. Decentralization is most effective in organizations where cost and s ---c. pruut mwsurement is necessary and is most successful in organizations where subunits are totally independent and autonomous The benefits of decentralization include: 6.1 - Decisions are being made by those who have the most knowledge about local conditions - Theburde:n of decision making is distributed. Top management is likely to have more time for - the important strategic decisions. Greater IYianagerial input of decision making has a desirable motivational effect. Managers have more control over results . me cusrs 01aecentralization include: m - 1 - Managers have a tendency to look only at their g division and lose sight of overall company d - There can be costly duplication of services - Costsofabbtaining sufficient information increase. Tbo problems arise in a typical decentralized organization: performunce evaluation and transfer Pt'khR. 182 CHAP. 81 183 DECENTRALIZATION 8.2 EVALUATION OF DIVISIONAL PERFORMANCE The ability to measure performance is essential in developing management incentives and controlling the operation toward the achievement of organizational goals. A typical decentralized subunit is an investment center, which is responsible for an organization’s invested capital (operating assets) and the related operating income. There are two widely used measurements of performance for the investment center: the rate of return on investment .