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Principles of Accounting, Volume 2: Managerial Accounting

Summary

Principles of Accounting, Volume 2: Managerial AccountingSummary

Summary

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.

9.3 Describe the Types of Responsibility Centers

  • 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.

9.4 Describe the Effects of Various Decisions on Performance Evaluation of 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.
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