9.5: Summary and Key Terms

Section Summaries

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.

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 evaluted 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

Contributors and Attributions

• Template:ContribManagerialAccountingOpenStax