Transcript Document 7158572

Introduction to Management Accounting
©2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 10 - 1
Introduction to Management Accounting
Chapter 10
Management Control
in Decentralized Organizations
©2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 10 - 2
Learning
Objective 1
Decentralization
The delegation of freedom to make
decisions is called decentralization.
The process by which decision making is
concentrated within a particular location
or group is called centralization.
The lower in the organization that
this freedom exists, the greater
the decentralization.
©2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 10 - 3
Costs and Benefits
Benefits of decentralization:
Lower-level managers have the best
information concerning local conditions.
It promotes management skills which,
in turn, helps ensure leadership continuity.
Managers enjoy higher status from being
independent and thus are better motivated.
©2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 10 - 4
Costs and Benefits
Costs of decentralization:
Managers may make decisions that are
not in the organization’s best interests.
Managers also tend to duplicate services
that might be less expensive if centralized.
Costs of accumulating and processing
information frequently rise.
©2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 10 - 5
Costs and Benefits
Managers in decentralized units may waste
time negotiating with other units about goods
or services one unit provides to the other.
©2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 10 - 6
Middle Ground
Many companies find that decentralization
works best in part of the company, while
centralization works better in other parts.
Decentralization is most successful
when an organization’s segments are
relatively independent of one another.
©2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 10 - 7
Segment Autonomy
If management has decided in favor
of heavy decentralization, segment
autonomy, the delegation of decisionmaking power to managers of segments
of an organization, is also crucial.
©2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 10 - 8
Responsibility Centers and
Decentralization
Learning
Objective 2
Design of a management control system should
consider two separate dimensions of control:
1
2
Responsibilities
Autonomy
©2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 10 - 9
Responsibility Centers and Decentralization
Profit centers
Decentralization
These are entirely separate concepts
and one can exist without the other.
©2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 10 - 10
Responsibility Centers and Decentralization
All control systems are imperfect.
The choice among systems should be
based on which one will bring more
of the actions top management seeks.
©2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 10 - 11
Learning
Objective 3
Motivation, Performance, and Rewards
Criteria and Choices when Designing
a Management Control System
Choice of Responsibility
Centers and Incentives
Motivational criteria
Goal
Congruence
Managerial
Effort
Actions
Performance
Measures
Rewards
Feedback
Feedback
©2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 10 - 12
Motivation, Performance, and Rewards
Incentives. . .
Performance-based
rewards that enhance
managerial effort toward
organizational goals.
Motivational
Criteria
Rewards
©2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 10 - 13
Motivation, Performance, and Rewards
You get what you measure!
Therefore, accounting measures,
which provide relatively objective
evaluations of performance,
are important.
©2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 10 - 14
Agency Theory, Performance, Rewards, and Risks
Agency theory deals with contracting between
an organization and the managers that it hires
to make decisions on its behalf.
Incentive
Risk
Cost of measuring
performance
©2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 10 - 15
Learning
Objective 4
Measures of Profitability
Profitability does not mean
the same thing to all people.
Is it net income?
Income before taxes?
Net income percentage based on revenue?
Is it an absolute amount?
A percentage?
©2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 10 - 16
Return on Investment
ROI = Income ÷ Investment
ROI
=
Income
Revenue
×
Revenue
Investment
©2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 10 - 17
Return on Investment
Division A ROI: = Income ÷ Investment
$200,000 ÷ $500,000 = 40%
Division B ROI: = Income ÷ Investment
$150,000 ÷ $250,000 = 60%
©2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 10 - 18
Residual Income
RI is defined as after-tax net operating
income less a capital charge.
Capital charge is the cost of capital
multiplied by the amount of investment.
RI tells you how much a company’s
after-tax operating income exceeds
what it is paying for capital.
©2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 10 - 19
Economic Value Added
Economic value added (EVA)
= Adjusted after-tax operating income
– Cost of invested capital (%)
× Adjusted average invested capital
©2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 10 - 20
ROI or Residual Income?
Why do some companies prefer
economic profit (or EVA) to ROI?
Under ROI, the message is go forth and
maximize your rate of return, a percentage.
Under EVA, the message is go forth and maximize
economic profit, an absolute dollar amount.
©2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 10 - 21
Learning
Objective 5
Invested Capital
To apply either ROI or residual income,
both income and invested capital
must be measured and defined.
Total assets
 Total assets employed
 Total assets less current liabilities
 Stockholders’ equity

©2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 10 - 22
Valuation of Assets
Should values be based on historical cost
or some version of current value?
Practice is overwhelmingly in favor of using
net book value based on historical cost.
Most companies use net book value in
calculating their investment base.
©2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 10 - 23
Learning
Objective 6
Transfer Prices
The price that one segment charges another
segment of the same organization for a
product or service is a transfer price.
©2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 10 - 24
Purpose of Transfer Pricing
Why do transfer-pricing systems exist?
Management wants to create
performance measurement systems.
Decisions that maximize a segment’s
profit should also maximize the
profits of the entire company.
©2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 10 - 25
Purpose of Transfer Pricing
Multinational companies use transfer
pricing to minimize their worldwide
taxes, duties, and tariffs.
©2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 10 - 26
Learning
Objective 7
General Rule
Transfer price = Outlay cost + Opportunity cost
Fabric division outlay cost = $6; Opportunity cost = $4
Fabric transfer price = $10
Sportswear division cost = Transfer price + Other costs
$22 = $10 + $12; Selling price = $25
©2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 10 - 27
Transfer-pricing Systems
1. Market-based transfer prices
2. Cost-based transfer prices
a. Variable Cost
b. Full cost (possibly pus profit)
3. Negotiated transfer prices
©2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 10 - 28
Market-Based Transfer Prices
If a market price exists, use it.
Using the market price as a transfer price
will generally lead to the desired goal
congruence and managerial effort.
In this case, the market price is equal to
the variable cost plus opportunity cost.
©2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 10 - 29
Market-Based Transfer Prices Drawbacks
Market prices are not always available
for items transferred internally.
Imperfectly competitive markets exist.
When market prices don’t exist, most
companies resort to cost-based transfer prices.
©2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 10 - 30
Variable-Cost Pricing
This transfer pricing system is
most appropriate when the
selling division forgoes no
opportunity when it transfers
the item internally.
Cost-based transfer prices lead to
dysfunctional decisions - decisions in
conflict with the company’s goals.
©2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 10 - 31
Full-Cost Pricing
This transfer pricing system includes not only
variable cost but also an allocation of fixed
costs (and, if included, the profit mark-up.)
It is implicitly assumed that the allocation
is a good approximation of the opportunity cost.
Dysfunctional decisions arise with full-cost
transfer prices when the selling segment has
opportunity costs that differ significantly from the
allocation of fixed costs and profit.
©2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 10 - 32
Negotiated Transfer Prices
Companies heavily committed to segment
autonomy often allow managers
to negotiate transfer prices.
Virtually any type of transfer pricing policy
can lead to dysfunctional behavior – actions
taken in conflict with organizational goals.
©2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 10 - 33
The Need for Many Transfer Prices
The “correct” transfer price depends on
the economic and legal circumstances
and the decision at hand.
Organizations may have to make trade-offs
between pricing for congruence and
pricing to spur managerial effort.
State fair-trade laws and national antitrust
acts can also influence transfer pricing.
©2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 10 - 34
Learning
Objective 8
Multinational Transfer Pricing Example
A high-end running shoe produced by an Irish
Nike division with a 12% income tax rate.
It is transferred to a division in
Germany with a 40% income tax rate.
An import duty equal to 20% of the
price of the item is imposed by Germany.
Full unit cost is $100, and variable cost is
$60 (either transfer price could be chosen).
©2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 10 - 35
Multinational Transfer Pricing Example
Tax authorities allow either variable- or
full-cost transfer prices.
Which transfer price should be chosen?
©2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 10 - 36
Multinational Transfer Pricing Example
Income of the Irish division is $40 higher:
12% × $40 = ($4.80) higher taxes
Income of the German division is $40 lower:
40% × $40 = $16 lower taxes
Import duty paid by German division:
20% × $40 = ($8)
Net savings = $3.20
©2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 10 - 37
Learning
Objective 9
Management by Objectives
MBO describes the joint formulation by
a manager and his or her superior of a
set of goals and plans for achieving
the goals for a forthcoming period.
The manager’s performance is then
evaluated in relation to these
agreed-upon budgeted objectives.
©2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 10 - 38
Budgets, Performance Targets, and Ethics
Many of the troublesome motivational
effects of performance evaluation
systems can be minimized by
the astute use of budgets.
The desirability of tailoring a budget
to particular managers cannot
be overemphasized.
©2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 10 - 39
Budgets, Performance Targets, and Ethics
Using budgets as performance
targets also has its danger.
Companies that make meeting
a budget too important can
motivate unethical behavior.
©2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 10 - 40
The End
End of Chapter 10
©2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 10 - 41