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Lecture Managerial accounting Creating value in a dynamic business environment (Tenth edition): Chapter 13 - Ronald W. Hilton, David E. Platt

Chapter 13 - Investment centers and transfer pricing. After completing this chapter, you should be able to: Explain the role of managerial accounting in achieving goal congruence; compute an investment center’s return on investment (ROI), residual income (RI), and economic value added (EVA); explain how a manager can improve ROI by increasing either the sales margin or capital turnover. | Investment Centers and Transfer Pricing Chapter 13 Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Chapter 13: Investment Centers and Transfer Pricing Decision-Making is pushed down. Delegation of Decision Making (Decentralization) Decentralization often occurs as organizations continue to grow. 13- As organizations grow, decision-making must be pushed down to lower level managers. Organizations often decentralize into subunits to take advantage of the specialized skills and talents of their sub-managers. (LO1) Decentralization Advantages Allows organization to respond more quickly to events. Frees top management from day-to-day operating activities. Uses specialized knowledge and skills of managers. 13- Some of the advantages of pushing decision-making down to lower level managers are: it allows managers to respond more quickly to events, it uses the skills of those managers, and it frees upper management to focus on long-term planning and other strategic goals. (LO1) Decentralization Challenge Goal Congruence: Managers of the subunits make decisions that achieve top-management goals. 13- The challenge, for a decentralized organization, is to induce managers to behave in a manner that achieves organizational goals, rather than focusing on the goals of the subunit. (LO1) Return on Investment (ROI) ROI = Income Invested Capital ROI = Income Sales Revenue × Sales Revenue Invested Capital Sales Margin Capital Turnover 13- Return on investment is calculated by simply dividing the investment center’s net income by the amount invested in the division. The ROI figure can be broken into two insightful measurements, the center’s sales margin and the turnover ratio. (LO2) Return on Investment (ROI) Holly Company reports the following: Income $ 30,000 Sales Revenue $ 500,000 Invested Capital $ 200,000 Let’s calculate ROI. 13- Here is an example of . | Investment Centers and Transfer Pricing Chapter 13 Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Chapter 13: Investment Centers and Transfer Pricing Decision-Making is pushed down. Delegation of Decision Making (Decentralization) Decentralization often occurs as organizations continue to grow. 13- As organizations grow, decision-making must be pushed down to lower level managers. Organizations often decentralize into subunits to take advantage of the specialized skills and talents of their sub-managers. (LO1) Decentralization Advantages Allows organization to respond more quickly to events. Frees top management from day-to-day operating activities. Uses specialized knowledge and skills of managers. 13- Some of the advantages of pushing decision-making down to lower level managers are: it allows managers to respond more quickly to events, it uses the skills of those .