Evaluating

CHAPTER Decentralized
2 Operations

4
 Centralized and Decentralized Operations

集权和分权经营
In a centralized company, all major planning and
operating decisions are made by top management.
In a decentralized company, managers of separate
divisions or units are delegated operating
responsibility.
The division (unit) managers are responsible for
planning and controlling the operations of their
divisions, which are often structured around products,
customers, or regions.
 Advantages of Decentralization
(slide 1 of 2)

分权的优点
For large companies, it is difficult for top
management to:
Maintain daily contact with all operations
Maintain operating expertise in all product lines and
services
In such cases, delegating authority to managers
closest to the operations usually results in better
decisions.
 Advantages of Decentralization
(slide 2 of 2)
• Decentralized operations provide excellent training
for managers.
• Delegating responsibility allows managers to
develop managerial experience early in their careers.
• This helps a company retain managers, some of
whom may be later promoted to top management
positions.
• Managers of decentralized operations often work
closely with customers.
• As a result of this, they tend to identify with
customers and, thus, are often more creative in
suggesting operating and product improvements.
• This helps create good customer relations.
 Disadvantages of Decentralization

• 分权的缺点
• A primary disadvantage of decentralized operations
is that decisions made by one manager may
negatively affect the profits of the company.
• Another disadvantage of decentralized operations is
that assets and expenses may be duplicated across
divisions.
Advantages and Disadvantages
of Decentralized Operations
 Responsibility Accounting
• In a decentralized business, accounting assists
managers in evaluating and controlling their areas of
responsibility, called responsibility centers.
– Responsibility accounting （责任会计） is the
process of measuring and reporting operating data
by responsibility center.
– Three types of responsibility centers are as follows:
• Cost centers, which have responsibility over
costs
• Profit centers, which have responsibility over
revenues and costs
• Investment centers, which have responsibility
over revenues, costs, and investment in assets
 Responsibility Accounting for Cost Centers
(slide 1 of 2)

• A cost center （成本中心） manager has

responsibility for controlling costs.
• However, a cost center manager does not make
decisions concerned sales or the amount of fixed
assets invested in the center.
• Cost centers may vary in size from a small
department to an entire manufacturing plant.
• Cost centers may exist within other cost centers.
Cost Centers in a University

大学内的成本中心
 Responsibility Accounting for Cost Centers
(slide 2 of 2)

• Responsibility accounting for cost centers focuses

on the controlling and reporting of costs.
• Budget performance reports that report budgeted
and actual costs are normally prepared for each cost
center.
 Responsibility Accounting for Profit Centers
(slide 1 of 3)

• A profit center （利润中心） manager has the

responsibility and authority for making decisions
that affect both revenues and costs and, thus,
profits.
• Profit centers may be divisions, departments, or
products.
• The manager does not make decisions concerned
the fixed assets invested in the center.
 Responsibility Accounting for Profit Centers
(slide 2 of 3)

• Responsibility accounting for profit center focuses

on reporting revenues, expenses, and income from
operations.
– Thus, responsibility accounting reports for profit
centers take the form of income statements.
 Responsibility Accounting for Profit Centers
(slide 3 of 3)

• The profit center income statement should include

only revenues and expenses that are controlled by
the manager.
– Controllable revenues （可控收入） are
revenues earned by the profit center.
– Controllable expenses （可控费用） are costs
that can be influenced (controlled) by the
decisions of the profit center managers.
 Profit Center Reporting

• 利润中心报告
• In evaluating the profit center manager, the
income from operations should be compared
over time to a budget.
• However, it should not be compared across profit
centers, because the profit centers are usually
different in terms of size, products, and
customers.
Divisional Income Statements—
NEG
 Responsibility Accounting for Investment Centers
(slide 1 of 2)
• An investment center （投资中心） manager has
the responsibility and the authority to make
decisions that affect not only costs and revenues but
also the assets invested in the center.
• Investment centers are often used in diversified
companies by divisions.
– In such cases, the divisional manager has
authority similar to that of a chief operating
officer or president of a company.
 Responsibility Accounting for Investment Centers
(slide 2 of 2)

• Because investment center managers have

responsibility for revenues and expenses, income
from operations is part of investment center
reporting.
• In addition, because the manager has responsibility
for the assets invested in the center, the following
two additional measures of performance are used:
• Rate of return on investment 投资收益率
• Residual income 剩余收益
 Return on Investment
(slide 1 of 13)

• Because investment center managers control the

amount of assets invested in their centers, they
should be evaluated on the use of these assets.
• One measure that considers the amount of assets
invested in an investment center is the rate of return
on investment (ROI) or rate of return on assets. 投资
收益率
• The rate of return on investment (ROI) is computed
as follows:
 Return on Investment
(slide 2 of 13)

• The rate of return on investment is useful because

the three factors subject to control by divisional
managers (revenues, expenses, and invested assets)
are considered.
• The higher the rate of return on investment, the
better the division is using its assets to generate
income.
• In effect, the rate of return on investment measures
the income (return) on each dollar invested.
• As a result, the rate of return on investment can be
used as a common basis for comparing divisions
with each other.
 Return on Investment
(slide 5 of 13)

To analyze differences in the rate of investment across

divisions, the DuPont formula （杜邦公式） for the
rate of return on investment is often used.
The DuPont formula views the rate of return on
investment as the product of the following two
factors:
Profit margin （利润率） , which is the ratio of income
from operations to sales.
Investment turnover （投资周转率） , which is the ratio
of sales to invested assets.
 Return on Investment
(slide 6 of 13)

Using the DuPont formula, the rate of return on

investment is expressed as follows:
 Residual Income
(slide 1 of 3)
Residual income is useful in overcoming some of the
disadvantages of the rate of return on investment.
•Residual Income （剩余收益） is the excess of
income from operations over a minimum acceptable
income from operations.
– The minimum acceptable income from
operations is computed by multiplying the
company minimum rate of return by the invested
assets
• The minimum rate is set by top management,
based on such factors as the cost of financing.
Residual Income
Residual Income—DataLink, Inc.
 Residual Income
(slide 2 of 3)
• The major advantage of residual income as a
performance measure is that it considers both the
minimum acceptable rate of return, invested assets,
and the income from operations for each division.
– In doing so, residual income encourages division
managers to maximize income from operations in
excess of the minimum.
• This provides an incentive to accept any
project that is expected to have a rate of
return in excess of the minimum.
 The Balanced Scorecard
(slide 1 of 2)

• The balanced scorecard （平衡计分卡） is a set of

multiple performance measures for a company.
• In addition to financial performance, a balanced
scorecard normally includes performance measures
for the following:
• Customer service 客户服务
• Innovation and learning 创新与学习
• Internal processes 内部流程
The Balanced Scorecard

平衡计分卡
 The Balanced Scorecard
(slide 2 of 2)

• The balanced scorecard attempts to identify the

underlying nonfinancial drivers, or causes, of
financial performance related to innovation and
learning, customer service, and internal processes.
• In this way, the financial performance may be
improved.
 Transfer Pricing
(slide 1 of 2)

When divisions transfer products or render services to

each other, a transfer price （转让定价） is used to
charge for the products or services.
Because transfer prices will affect a division’s
financial performance, setting a transfer price is a
sensitive matter for the managers of both the selling
and buying divisions.
Three common approaches to setting transfer prices
are as follows:
Market price approach 市场定价法
Negotiated price approach 协商定价法
Cost approach 成本定价法
 Transfer Pricing
(slide 2 of 2)

• The objective of setting a transfer price is to

motivate managers to behave in a manner that
will increase the overall company income.
• Transfer prices can be set as low as the variable
cost per unit or as high as the market price.
Often, transfer prices are negotiated at some
point between the two.
 Market Price Approach

• Using the market price approach （市场定价法） , the

transfer price is the price at which the product or
service transferred could be sold to outside buyers.
• If an outside market exists for the product or service
transferred, the current market price may be a
proper transfer price.
Contribution Margin Income Statement Format
 Negotiated Price Approach

The negotiated price approach （协商定价

法） allows the managers to agree (negotiate)
among themselves on a transfer price.
The only constraint is that the transfer price be less
than the market price, but greater than the
supplying division’s variable costs per unit, as
follows:
 Cost Price Approach
(slide 1 of 3)

• Under the cost price approach （成本定价法） , cost

is used to set transfer prices.
• A variety of costs may be used in this approach,
including:
• Total product cost per unit
• If total product cost per unit is used, direct
materials, direct labor, and factory overhead are
included in the transfer price.
• Variable product cost per unit
• If variable product cost per unit is used, the fixed
factory overhead cost is excluded from the transfer
price.
 Cost Price Approach
(slide 2 of 3)

• Actual costs or standard (budgeted) costs may be

used in applying the cost price approach.
• If actual costs are used, inefficiencies of the
purchasing (supplying) division are transferred to
the purchasing division.
• Thus, there is little incentive for the producing
(supplying) division to control costs.
• Most companies use standard costs in the cost price
approach.
• In this way, differences between actual and standard
costs remain with the producing (supplying) division
for cost control purposes.
 Cost Price Approach
(slide 3 of 3)

• The cost price approach is most often used when

the responsibility centers are organized as cost
centers.
谢谢观看

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