Chapter 9

• Centralization


  A business structure where one individual makes important decisions and provides strategic direction to the company
• Centralization


  • Clarity in decision making
  • Streamlined implementation of policies and activities
• Centralization - Disadvantages

  • Limited opportunities for employees to provide feedback
  • Risk of inflexibility
• Decentralization


  A process of delegating decision making authority through an organization
• Decentralization - Benefits


  • Allows various operating authorities to make decisions related to their areas of responsibility
  • Shows how responsibility is divided among managers
• Decentralization - Advantages


  • Creates greater responsiveness to local needs
  • Leads to gains from quicker decision making
  • Increases motivation of subunit managers
  • Sharpens focus of subunit managers
  • Decisions are best made at the level where the problem/opportunity arises
  • Management is relieved of day-to-day operations and can focus on long-range planning and coordination
  • Segment managers obtain more job satisfaction and are encouraged to put forth their best efforts
• Decentralization - Limitations

  • Dysfunctional decision making may result in suboptimal or incongruent decisions
  • Managers may focus only on their subunit rather than the organization as a whole
  • Cost to gather information is increased
  • Activities may be duplicated
• Segment Reporting


  A statement of income designed to focus on various segments of a company
• Segment


  Any part or activity of an organization for which managers seek cost, revenue or profit data
• Contribution Margin


  Sales revenue minus variable expenses, yielding the amount available to cover fixed costs and provide profit
• Segment Margin


  The margin available after a segment has covered all its own costs, and is the best gauge of the long-run profitability of the segment
• Problems Related to Proper Cost Assignment

  • Omitting Cost
  • Inappropriate methods for allocating costs among segment.
• Responsibility Accounting

  Evaluating each manager on revenue and expense items over which the manager has primary control
• Responsibility Centers

  • Cost Centers
  • Revenue Centers
  • Profit Centers
  • Investment Centers
• Variable costs are those that change as output changes, while fixed costs remain constant regardless of output levels.
• Problems Related to Proper cost assignment

  • ommission of Cost
  • Inappropriate method for allocating cost among segment
  • Arbitrarily dividing common cost among segment
• Occur as cost improperly assigned company company segment

  Cash Distortion/Cross Subdization
• Purpose of segment reporting

  • Provide information needed by manager to determine profitability of product line, decision, sale territories & other segment.
• 2 kinds of fixed cost

  1. Traceable cost - incurred as consequence of existence segment & could easily identified or traced at particular segment
  2. Segment Margin - Represent margin available after segment covered all its own cost and best gauge long run profitability of segment