©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Performance Evaluation for Decentralized Operations CHAPTER 14

©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Learning Objectives After studying this chapter, you should be able to: Describe the advantages and disadvantages of decentralized operations Prepare a responsibility accounting report for a cost center Prepare a responsibility accounting report for a profit center Compute and interpret the rate of return on investment, the residual income, and the balanced scorecard for an investment center Describe and illustrate how the market price, negotiated price, and cost price approaches to transfer pricing may be used by decentralized segments of a business

©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Describe the advantages and disadvantages of decentralized operations Learning Objective 1

©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Centralized and Decentralized Operations ___________ business – all major planning and operating decisions are made by top management ___________ business – separating a business into divisions and delegating responsibility to unit managers Divisions are structured around common functions, products, customers, or regions

©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Decentralization Advantages of Decentralization Delegating authority to unit managers: __________________________________ Disadvantages of Decentralization ________________________________________

©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Responsibility Accounting in Decentralized Operations Responsibility accounting is the process of _________________________________________ A responsibility center is the __________________ ________________________________ Types of Responsibility Centers

©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Prepare a responsibility accounting report for a cost center Learning Objective 2

©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Responsibility Accounting for Cost Centers Unit manager has responsibility and authority for _______

©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Responsibility Accounting for Cost Centers

©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Prepare a responsibility accounting report for a profit center Learning Objective 3

©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Responsibility Accounting for Profit Centers Unit manager has the responsibility and authority for ____________ and ____________ Focus is on _______ revenues and expenses We’ll illustrate profit center income reporting for the Tadpole Inc. Tadpole Inc. has two profit centers

©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Service Departments In addition to direct expenses, divisions may also have expenses for services provided by centralized service departments Examples include: Research and Development Purchasing ___________ A profit center’s income needs to reflect the __________________

©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Tadpole Inc., uses services provided by the Payroll Accounting service department

©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Allocating Service Charges An _______ for each service department is used to charge service department expenses to profit centers The activity bases for the centralized services Tadpole Inc., are as follows:

©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Service department charge rates determine how much to allocate to each division Tadpole Inc., service usages: Service Department Charge Rate = Allocating Service Charges

©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Allocating Service Charges

©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Divisional Income Statements

©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Compute and interpret the rate of return on investment, the residual income, and the balanced scorecard for an investment center Learning Objective 4

©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Responsibility Accounting for Investment Centers Unit manager has responsibility and authority for __________, __________, and ____________ Income from operations is important, but so is the ___________ and __________ income We’ll use In-Touch Inc., a cellular phone company, to illustrate the accounting for investment centers

©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Responsibility Accounting for Investment Centers In-Touch has three investment centers The Central Division seems to be the most profitable

©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Rate of Return on Investment (ROI) Measures profitability in terms of __________ Income from Operations Invested Assets The ____________ is the least profitable when using ROI as the measure of profitability ROI =

©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. DuPont Formula An expanded ROI formula using two factors: ____________ ROI can be improved by ______ the profit margin or investment turnover

©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. DuPont Formula This method allows for greater analysis by separating profitability and investment turnover Rate of return on Investment = ×

©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. DuPont Formula

©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Residual Income Excess of ___________ over a minimum acceptable income from operations

©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. In-Touch’s Residual Income Assuming a 10% minimum acceptable rate of return The Northern Division has the _______

©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. _______________ Uses financial and nonfinancial data to evaluate a division

©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Describe and illustrate how the market price, negotiated price, and cost price approaches to transfer pricing may be used by decentralized segments of a business Learning Objective 5

©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Transfer Pricing Price assigned when a good or service is transferred from ________ to another within a company

©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Three Transfer Pricing Approaches ______________ Approach Transfer price is the price at which the product or service transferred could be sold to outside buyers ______________ Approach Allows managers of decentralized units to negotiate among themselves as to the transfer price Must be less than market price, but more than the variable cost per unit ______________ Approach Cost is used to set transfer price Can use actual product cost, variable costs, or standards costs

©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. End of Chapter 14