9.1 Differentiate between Centralized and Decentralized Management

Management control systems allow managers to develop a reporting structure to help the organization meet its strategic goals.
In centralized organizations, primary decisions are made by the person or persons at the top of the organization.
Decentralized organizations delegate decision-making authority throughout the organization.
Daily decision-making involves frequent and immediate decisions.
Strategic decision-making involves infrequent and long-term decisions.

9.2 Describe How Decision-Making Differs between Centralized and Decentralized Environments

Segments are uniquely identifiable components of the business that facilitate the effective and efficient operation of the business.
Organizational charts are used to graphically represent the authority structure of an organization.
The CEO of a centralized organization will establish the strategy and make decisions that will be implemented throughout the organization.
The CEO of a decentralized organization will establish strategic goals and empower managers to achieve the goals.

A responsibility accounting structure helps management evaluate the financial performance of the segments in the organization.
Responsibility centers are segments within a responsibility accounting structure.
Five types of responsibility centers include cost centers, discretionary cost centers, revenue centers, profit centers, and investment centers.
Cost centers are responsibility centers that focus only on expenses.
Discretionary cost centers are responsibility centers that focus only on controllable expenses.
Revenue centers are responsibility centers that focus on revenues.
Profit centers are responsibility centers that focus on revenues and expenses.
Investment centers are responsibility centers that consider the investments made by the responsibility center.
Return on investment is a particular type of investment center structure that calculates a responsibility center’s profit percentage relative to the center’s investment.
Residual income is a particular type of investment center structure that evaluates investments using a common cost of capital rate amongst all responsibility centers.

Uncontrollable costs are costs that management or an organization has little or no ability to influence.
Controllable costs are costs that managers or an organization can influence.
Managers in a responsibility accounting structure should only be evaluated based on controllable costs.
Businesses with segments that provide goods to other segments within the business often use a transfer pricing structure to record the transaction.
The general transfer pricing model considers the opportunity costs involved in selling to internal rather than external customers. This method is difficult to implement and businesses often choose other methods.
The market price model uses market prices that would be used for external customers as the basis for internal transfers.
The cost approach uses the company’s cost to make the product as the basis for establishing the transfer price.
The negotiated model allows the selling and buying segments within the business to determine the transfer price.
Transfer price arrangements are more difficult in international businesses because of complexities related to taxes, duties, and currency fluctuations.