M9 Outline

M9: Responsibility Accounting and Performance Evaluation 1. Why Do Decentralized Companies Need Responsibility Accounting? i. Centralized companies - one person manages decision making ii. Decentralized - company is split into departments that are each responsible for making decisions pertaining to that segment/department b. Advantages of Decentralization i. Frees top management time - by having each department focus on their operations, upper management can better focus on the overall company picture to develop business goals and strategies ii. Supports use of expert knowledge - by having only one person run everything, it spreads that person thin - decentralizing allows for people to split task up and specialize in certain areas iii. Improves customer relations - having more people to provide support allows for closer relationships with customers iv. Provides training - decentralization allows for more people to experience a role in management on a lower scale before possibly moving up to top management over the entire company c. Disadvantages of Decentralization i. Duplication of costs - by separating tasks to individual departments, there may be some functions (HR/payroll) that could be more cost efficient if they were running in a centralized location ii. Problems achieving goal congruence - departments may only be looking at their individual performance instead of looking at the company as a whole d. Responsibility Accounting i. Responsibility centers - the area a manager is responsible for making decisions and monitoring results 1. Cost center - manager is only responsible for controlling costs (i.e. department/line manager in manufacturing plant) 2. Revenue center - manager is only responsible for generating revenues (i.e. franchise retailer that cannot control cost) 3. Profit center - manager is responsible for generating revenue and controlling costs (i.e. manager of a single store location) 4. Investment center - manager is responsible for generating revenue, controlling costs, managing investment of capital, and planning future investments (i.e. manager of the entire division)

2. What Is A Performance Evaluation System, and How Is It Used? i. Performance evaluation system - framework for maintaining control over the organization b. Goals of Performance Evaluation Systems i. Promoting goal congruence and coordination - helps to make sure that individual department managers are moving in the same direction and achieving the overall company goals ii. Communicating expectations - helps communicate to department management the expectations that top management has to meet overall company goals iii. Motivating segment managers - the system can be used to evaluate department managers to possibly provide bonuses based on performance iv. Providing feedback - the system provides top management with feedback as to how each department is performing so that they can make adjustments as needed v. Benchmarking - by comparing company achievements to past performance, we can see how departments have performed and whether it is favorable or unfavorable c. Limitations of Financial Performance Measurement i. Lag indicators - a lot of financial ratios are calculated based off of the financial statement figures put together at year end - this analysis is typically done after the performance has already occurred ii. Short-term achievement focus - ratios typically are calculated for the quarter or the year, however, top management should be looking at larger spans of time iii. Operational performance measures - these are nonfinancial measures, such as customer satisfaction, that should be looked at in addition to financial performance measures

d. The Balanced Scorecard - type of performance evaluation system that looks at financial and operational performance measures to judge company performance i. Key performance indicators - summary performance measures used to measure critical factors that affect company success 1. Financial - How do we look to investors and creditors? a. Revenue growth - introduce new products, gain new customers, and increase sales b. Cutting cost 2. Customer - How do customers see us? a. Product/service attributes i. Price ii. Quality iii. Performance and service iv. Delivery time 3. Internal business - At what business processes must we excel to meet customer and financial objectives? a. Innovation - improve existing product and develop new products b. Operations - lean and effective operations c. Post-sale service 4. Learning and growth - How can we continue to improve and create value? a. Employee capabilities - skills, knowledge, motivation, and empowerment b. Information system capabilities - timely and accurate information on customers, internal processes, and finances c. Company's climate for action