ACTG 5P31

Advanced Management
Accounting
Hemantha Herath
12-1

Decentralization

Prepared
Preparedby
by
Hemantha
HemanthaHerath
Herath
Brock
BrockUniversity
University

6
12-2

Why
Why Decentralize?
Decentralize?
Decentralization
 The delegation of decision making authority to managers throughout the organization Centralization
Minimum freedom
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Decentralization
Maximum freedom

Complexity of Firm’s Environment
Information Specialization
Timeliness of Response
Conservation of Central Management Time
Computational Complexity
Training for Local Managers
Motivation for local managers

Costs of Decentralization
 Managers may make goal incongruent decisions
 Duplication of services (accounting and advertising)
 Increased cost of accumulating and processing information
 Managers may waste time arguing about shared services
12-3

Decentralization
Decentralization
 Most companies adopt a blend of decentralized and centralized functions

(decentralize marketing but centralize tax planning)
 Decentralization is most successful when organization's segments are relatively independent Diversified
Product Line
No Problems

Single Industry
Multi-Product

Single
Product
Common Problems

 Decentralization cannot work unless top management is willing to abide by its

managers' decisions

 Stepping in and overriding managers' decisions will quickly result in

motivational problems

Profit Centres and Decentralization
 Be careful to separate these two ideas
 Profit centres hold a manager accountable for revenues & expenses
 Decentralized manager has the freedom to make decisions
 Cost centre may be more decentralized than a profit centre if the cost centre manager has more authority
12-4

Management
Management Control
Control Systems
Systems
An orderly, logical plan to coordinate and evaluate all activities
1.

Begin by specifying the organization's goals, sub-goals and objectives


Goals are what the organization hopes to achieve in the long run

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Sub-goals or key success factors are more specific and provide more focus to guide daily actions

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Objectives are specific benchmarks which management would like to see achieved

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Important to keep all three in balance to avoid concentrating solely on short-run achievements at the expense of long run goals

2.

Establish responsibility centers

3.

Develop performance measures

4.

Measure and report on financial performance

5.

Measure and report on non-financial performance
12-5

Management
Management Control
Control Systems
Systems
Set Goals,
Measures,
Targets

Plan and Execute

Feedback and Learning

Evaluate,
Reward

Monitor,
Report
12-6

Responsibility
Responsibility Centers
Centers
 Set of activities assigned to a manager or a group of managers/employees
 Based on principle of responsibility accounting which holds that managers

should be evaluated on the activities which they can influence or control
Standard Cost Centre
 Area for which cost data is accumulated such as an assembly department
Discretionary Expense Centre
 Area dominated by discretionary expenses such as legal or accounting
Revenue Centre
 Area primarily responsible for generating sales such as a sales office
Profit Centre
 Area responsible for controlling costs and generating revenues
Investment Centre
 Area responsible for income (revenues - expenses) in relation to its invested capital

12-7

Developing
Developing Performance
Performance Measures
Measures
Good performance measures will
1. Relate to the