ACT500-Module 10-Discussion Forum: Decentralized Operations

I need help completing a discussion board post for my finance course (Managerial Accounting). Below are the exact requirements provided by my instructor:

Description:

Decentralized Operations

Sherry Smith is the president/CEO of Tiller Components. She founded the firm and has led it to become an industry leader in the area of automobile manufacturing components and parts. The company has plants in over 35 areas across the country. Smith is finding that she cannot manage and stay on track with things the way she was able to in the past.

• Discuss the decision-making approaches (centralized and decentralized)that you might use if you were the CEO of Tiller Components and how this would affect the different local and regional managers.
• What activities would be conducted centrally and which would you decentralize?
• How would the shifts in this method of decision-making and management that you suggest impact the company overall?
• Further, how can the use of analytical tools assist Smith with better understanding how each of her divisions and segments are performing?

Directions:

• Discuss the concepts, principles, and theories from your textbook. Be sure to cite the textbook and use the lectures provided so that the analysis aligns with the material we’ve covered so far in the course.
• Your initial post should address all components of the question with a 550-650 words limit.
• Please ensure that the citations and analysis reflect the concepts we’ve discussed in class, so it doesn’t appear that the analysis was done using advanced skills we haven’t covered yet.

Readings

Required:

• Chapter 10 in Managerial Accounting
• Bragg, S. (2022, April 29). Decentralized organizational structure. AccountingTools. https://www.accountingtools.com/articles/decentralized-organizational-structure (seminal)

Recommended:

• Chapter 10 PowerPoint slides in Managerial Accounting
• Vantrappen, H., & Wirtz, F. (2017, December 26). When to Decentralize Decision Making, and When Not To. Harvard Business Review. https://hbr.org/2017/12/when-to-decentralize-decision-making-and-when-not-to (seminal)

Note: I’ve attached the slides for the relevant chapter and an article for additional reference.

Chapter 10
Evaluating
Decentralized
Operations
Centralized and Decentralized Operations
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Advantages of Decentralization
(slide 1 of 2)
• For large companies, it is difficult for top
management to:
o Maintain daily contact with all operations
o Maintain operating expertise in all product lines and
services
• In such cases, delegating authority to managers
closest to the operations usually results in better
decisions.
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Advantages of Decentralization
(slide 2 of 2)
• Decentralized operations provide excellent training
for managers.
• Delegating responsibility allows managers to
develop managerial experience early in their
careers.
o
This helps a company retain managers, some of whom
may be later promoted to top management positions.
• Managers of decentralized operations often work
closely with customers.
o
As a result of this, they tend to identify with customers and,
thus, are often more creative in suggesting operating and
product improvements.
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Disadvantages of Decentralization
Decisions made by one manager may
negatively affect the profits of the company.
Assets and expenses may be duplicated
across divisions.
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Advantages and Disadvantages
of Decentralized Operations
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Responsibility Accounting
• In a decentralized business, accounting assists
managers in evaluating and controlling their
areas of responsibility, called responsibility
centers.
o Responsibility accounting is the process of
measuring and reporting operating data by
responsibility center.
o Three types of responsibility centers are as follows:
▪ Cost centers, which have responsibility over costs
▪ Profit centers, which have responsibility over revenues and costs
▪ Investment centers, which have responsibility over revenues, costs,
and investment in assets
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Responsibility Accounting for Cost Centers
• A cost center manager has responsibility for
controlling costs.
o However, a cost center manager does not make
decisions concerning sales or the amount of fixed
assets invested in the center.
• Cost centers may vary in size from a small
department to an entire manufacturing plant.
• Cost centers may exist within other cost centers.
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Cost Centers in a University
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Responsibility Accounting for Cost Centers
(slide 2 of 3)
• Responsibility accounting for cost centers
focuses on the controlling and reporting of costs.
• Budget performance reports that report
budgeted and actual costs are normally
prepared for each cost center.
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Responsibility Accounting for Profit Centers
(slide 1 of 3)
• A profit center manager has the responsibility
and authority for making decisions that affect
both revenues as well as costs and profits.
o Profit centers may be divisions, departments, or
products.
o The manager does not make decisions concerning
the fixed assets invested in the center.
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Responsibility Accounting for Profit Centers
(slide 2 of 3)
• Responsibility accounting for profit centers
focuses on reporting revenues, expenses, and
operating income.
o Thus, responsibility accounting reports for profit
centers take the form of income statements.
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Responsibility Accounting for Profit Centers
(slide 3 of 3)
• The profit center income statement should
include only revenues and expenses that are
controlled by the manager.
o Controllable revenues are revenues earned by the
profit center.
o Controllable expenses are costs that can be
influenced (controlled) by the decisions of the profit
center managers.
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Service Department Charges
(slide 1 of 3)
• The controllable expenses of profit centers include direct
operating expenses such as sales salaries and utility
expenses.
• A profit center may incur expenses provided by internal
centralized service departments.
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Service Department Charges
(slide 2 of 3)
• Service department charges are indirect
expenses to a profit center.
o They are similar to the expenses that would be
incurred if the profit center purchased the services
from outside the company.
• A profit center manager has control over service
department expenses if the manager is free to
choose how much service is used.
o In such cases, service department allocations are
assigned to profit centers based on the usage of the
service by each profit center.
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Service Department Charges
(slide 3 of 3)
• The services used by each division are
multiplied by the service department allocation
rates to determine the service department
allocations for each division, computed as
follows:
Support Department Allocation = Service Usage × Support Department Allocation Rate
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Profit Center Reporting
• In evaluating the profit center manager,
operating income should be compared over time
to a budget.
• However, it should not be compared across
profit centers because the profit centers are
usually different in terms of size, products, and
customers.
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Responsibility Accounting for
Investment Centers (slide 1 of 2)
• An investment center manager has the
responsibility and the authority to make
decisions that affect not only costs and revenues
but also the assets invested in the center.
• Investment centers are often used in diversified
companies organized by divisions.
o In such cases, the divisional manager has authority
similar to that of a chief operating officer or president
of a company.
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Responsibility Accounting for
Investment Centers (slide 2 of 2)
• Because investment center managers have
responsibility for revenues and expenses,
operating income is part of investment center
reporting.
• In addition, because the manager has
responsibility for the assets invested in the
center, the following two additional measures of
performance are used:
o Return on investment
o Residual income
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Return on Investment
(slide 1 of 7)
• Because investment center managers control the
amount of assets invested in their centers, they
should be evaluated on the use of these assets.
• One measure that considers the amount of assets
invested in an investment center is the return on
investment (R O I) or return on assets.
• The return on investment (R O I) is computed as
follows:
Return on Investment (ROI) =
Operating Income
Invested Assets
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Return on Investment
(slide 2 of 7)
• The return on investment is useful because the
three factors subject to control by divisional
managers (revenues, expenses, and invested
assets) are considered.
o The higher the return on investment, the better the
division is using its assets to generate income.
• In effect, the return on investment measures the
income (return) on each dollar invested.
o
As a result, the return on investment can be used as a
common basis for comparing divisions with each other.
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Return on Investment
(slide 3 of 7)
• To analyze differences in the return on
investment across divisions, the DuPont
formula for the return on investment is often
used.
• The DuPont formula views the return on
investment as the product of two factors.
o Profit margin, which is the ratio of operating income
to sales
o Investment turnover, which is the ratio of sales to
invested assets
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Return on Investment
(slide 4 of 7)
• Using the DuPont formula, the return on
investment is expressed as follows:
Return on Investment = Profit Margin × Investment Turnover
Return on Investment =
Operating Income
Sales
×
Sales
Invested Assets
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Return on Investment
(slide 5 of 7)
• The DuPont formula is useful in evaluating divisions.
o This is because the profit margin and the investment
turnover reflect the following underlying operating
relationships of each division:
▪ Profit margin indicates operating profitability by computing the
profit earned on each sales dollar.
– If a division’s profit margin increases, and all other factors remain
the same, the division’s return on investment will increase.
▪ Investment turnover indicates operating efficiency by
computing the number of sales dollars generated by each
dollar of invested assets.
– If a division’s investment turnover increases, and all other factors
remain the same, the division’s return on investment will
increase.
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Return on Investment
(slide 6 of 7)
The return on investment, profit margin, and investment
turnover operate in relationship to one another.
More income can be earned by either increasing the investment
turnover, increasing the profit margin, or both.
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Return on Investment
(slide 7 of 7)
• A disadvantage of the return on investment as a
performance measure is that it may lead
divisional managers to reject new investments
that could be profitable for the company as a
whole.
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Residual Income
(slide 1 of 3)
• Residual income is useful in overcoming some
of the disadvantages of the return on
investment.
• Residual income is the excess of operating
income over a minimum acceptable operating
income.
o The minimum acceptable operating income is
computed by multiplying the company minimum
return on investment by the invested assets.
▪ The minimum rate is set by top management, based on such
factors as the cost of financing.
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Residual Income
(slide 2 of 3)
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Residual Income
(slide 3 of 3)
• The major advantage of residual income as a
performance measure is that it considers the
minimum acceptable return on investment,
invested assets, and the operating income for
each division.
o In doing so, residual income encourages division
managers to maximize operating income in excess of
the minimum.
▪ This provides an incentive to accept any project that is
expected to have a return on investment in excess of the
minimum.
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Transfer Pricing
(slide 1 of 2)
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Transfer Pricing
(slide 2 of 2)
• The objective of setting a transfer price is to
motivate managers to behave in a manner that
will increase the overall company income.
• Transfer prices can be set as low as the variable
cost per unit or as high as the market price.
o Often, transfer prices are negotiated at some point
between the two.
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Commonly Used Transfer Prices
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Market Price Approach
• Using the market price approach, the transfer
price is the price at which the product or service
transferred could be sold to outside buyers.
• If an outside market exists for the product or
service transferred, the current market price may
be a proper transfer price.
Transfer Price = Market Price
© 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Negotiated Price Approach
(slide 1 of 2)
• The negotiated price approach allows the
managers to agree (negotiate) among
themselves on a transfer price.
• The only constraint is that the transfer price be
less than the market price but greater than the
supplying division’s variable costs per unit, as
follows:
Variable Costs per Unit < Transfer Price < Market Price © 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Negotiated Price Approach (slide 2 of 2) • A negotiated price provides each division manager with an incentive to negotiate the transfer of materials. • At the same time, the overall company’s operating income will also increase. • However, the negotiated approach only applies when the supplying division has excess capacity. © 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Cost Price Approach (slide 1 of 3) • Under the cost price approach, cost is used to set transfer prices. • A variety of costs may be used in this approach, including: o Total product cost per unit ▪ Direct materials, direct labor, and factory overhead are included in the transfer price. o Variable product cost per unit ▪ The fixed factory overhead cost is excluded from the transfer price. © 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Cost Price Approach (slide 2 of 3) • Actual costs or standard (budgeted) costs may be used in applying the cost price approach. o If actual costs are used, inefficiencies of the producing (supplying) division are transferred to the purchasing division. ▪ Thus, there is little incentive for the producing (supplying) division to control costs. – Most companies use standard costs in the cost price approach. – In this way, differences between actual and standard costs remain with the producing (supplying) division for cost control purposes. © 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Cost Price Approach (slide 3 of 3) • The cost price approach is most often used when the responsibility centers are organized as cost centers. • When the responsibility centers are organized as profit or investment centers, the cost price approach is normally not used. © 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Franchise Operations (slide 1 of 3) • A franchise is the right or license granted to an individual or group to market a company’s goods or services. • The franchisor is the entity that provides the franchise, while the franchisee is the entity that pays for the franchise. • The franchise fee is often expressed as a percent of revenues earned by the franchisee. • In addition, the franchisee invests in the property and equipment to deliver the franchised product or service. © 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Franchise Operations (slide 2 of 3) • The franchisor often provides support in start-up, advertising, management development, business systems, and supplier relationships. o The benefits to a franchisee are instant access to a recognized brand, established customer base, and working business systems. o The main benefit to the franchisor is an ability to expand the brand without investing significantly in property and equipment. © 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Franchise Operations (slide 3 of 3) • From the franchisor’s perspective the return on investment for franchised operations should be increased by the low investment. o The DuPont formula should show a healthy profit margin combined with a high investment turnover. © 2020 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Name Discussion 25 Description 25 points Rubric Detail Levels of Achievement Criteria Exceeds Expectations Meets Expectation Some Expectations Unsatisfactory Quantity 5 to 6 points 3 to 4 points 1 to 2 points 0 to 0 points Initial post and two other posts of substance. Initial post and one other post of substance. Initial post only. Did not participate. 5 to 6 points 3 to 4 points 1 to 2 points 0 to 0 points Demonstrates excellent knowledge of concepts, skills, and theories relevant to the topic. Demonstrates knowledge of concepts, skills, and theories. Demonstrates satisfactory knowledge of concepts, skills, and theories. Did not participate. 5 to 6 points 3 to 4 points 1 to 2 points 0 to 0 points Discussion post(s) exceed expectations in terms of support provided and extend the discussion. Discussion post(s) meet expectations in terms of support provided. Statements are satisfactory in terms of support provided. Did not participate. 6 to 7 points 4 to 5 points 1 to 2 points 0 to 0 points Writing is well organized, clear, concise, and focused; no errors. Some significant but not major errors or omissions in writing organization, focus, and clarity. Numerous significant errors or omissions in writing organization, focus, and clarity. Did not participate. Content Support Writing View Associated Items Print Close Window