Key Terms
- allocated costs
- costs that are generated by non–revenue generating portions of the business, such as corporate headquarters, that are assigned based on some formula to the revenue generating portions of the business
- centralization
- business structure in which one individual makes the important decisions and provides the primary strategic direction for the company
- controllable costs
- those that a company or manager can influence
- cost approach
- transfer pricing structure in which the transfer price may be based on total variable cost, full cost, or a cost-plus scenario, calculated by adding a markup to either variable cost or full cost
- cost center
- organizational segment in which a manager is held responsible only for costs
- decentralization
- business structure in which the decision-making is made at various levels of the organization
- discretionary cost center
- organizational segment in which a manager is held responsible only for controllable costs when there is not a well-defined relationship between the center’s costs and its services or products
- goal congruence
- integration of multiple goals, either within an organization or across multiple components or entities; congruence is achieved by aligning goals to achieve an anticipated mission
- investment center
- organizational segment in which a manager is accountable for profits (revenues minus expenses) and the invested capital used by the segment
- lower-level management
- level of management that provides basic supervision and oversight for the operations of the organization
- management control system
- structure within an organization that allows managers to establish, implement, and monitor progress toward the strategic goals of the organization
- market price approach
- transfer pricing structure in which the transfer price is based on the price the seller would use for an outside customer
- mid-level management
- level of management that receives direction from upper management and supervises and provides direction to lower-level management
- negotiated price approach
- transfer pricing structure in which the transfer price is based on negotiations between the buying segment and the selling segment
- organizational chart
- graphical representations illustrating the authority for decision-making and oversight throughout an organization
- profit center
- organizational segment in which a manager is responsible for and evaluated on both revenues and costs
- residual income (RI)
- amount of income a given division (or project) is expected to earn in excess of a firm’s minimum return goal
- responsibility accounting
- method of encouraging goal congruence by setting and communicating the financial performance measures by which managers will be evaluated
- responsibility centers
- segments in which supervisors or managers have responsibility for the performance of the center and the authority to make decisions that affect the center
- return on investment (ROI)
- measure of the percentage of income generated by profits that were invested in capital assets
- revenue center
- part of an organization in which management is evaluated based on the ability to generate revenues; the manager's primary control is only revenues
- segment
- portion of the business that management believes has sufficient similarities in product lines, geographic locations, or customers to warrant reporting that portion of the company as a distinct part of the entire company
- transfer pricing
- pricing structure used when one segment of a business “sells” goods to another segment of the same business
- uncontrollable costs
- those that an organization or manager has little or no ability to influence
- upper management
- level of management that consists of the board of directors and chief executives charged with providing strategic guidance for the organization