Kế toán, kiểm toán - Chapter 12: Decentralization and performance evaluation

Slide 12-2CHAPTER 12 Decentralization and Performance EvaluationLearning objective 1: Explain the advantages and disadvantages of decentralization, explain why companies evaluate the performance of subunits and subunit managers, and identify cost centers, profit centers, and investment centers.Slide 12-3Decentralized OrganizationsAs firms increase in size and complexity, business segments or subunits are organizedThe managers of the segments are granted decision making authority so that the firm will function efficiently and effectivelyFirms that grant substantial decision making authority to the managers of subunits are referred to as decentralized organizationsSlide 12-4Decentralized OrganizationsMost firms are neither totally centralized nor totally decentralizedTypically, decentralization is a matter of degreeA firm is more decentralized if more decision making authority is delegated to sub-unit managersPerformance evaluation can be used to ensure that managers make decisions that are in the best interest of the entire firmLearning objective 1: Explain the advantages and disadvantages of decentralization, explain why companies evaluate the performance of subunits and subunit managers, and identify cost centers, profit centers, and investment centers.Slide 12-5Decentralized OrganizationsLearning objective 1: Explain the advantages and disadvantages of decentralization, explain why companies evaluate the performance of subunits and subunit managers, and identify cost centers, profit centers, and investment centers.Slide 12-6Advantages of DecentralizationA primary reason is that subunit managers have better information than top management and can respond quicker to changing circumstancesOther reasons includeSome firms decentralize because they believe that managers are more motivated and work harderDecentralized organizations provide excellent training for future top-level executivesLearning objective 1: Explain the advantages and disadvantages of decentralization, explain why companies evaluate the performance of subunits and subunit managers, and identify cost centers, profit centers, and investment centers.Slide 12-7Disadvantages of DecentralizationDecentralization can cause problemsIt may result in a costly duplication of activitiesManagers may pursue personal goals that are incompatible with the goals of the company as a wholeThis problem is called goal congruenceTo control goal congruence, companies evaluate the performance of subunit managersLearning objective 1: Explain the advantages and disadvantages of decentralization, explain why companies evaluate the performance of subunits and subunit managers, and identify cost centers, profit centers, and investment centers.All of the following are advantages of decentralization except:Faster response to changing circumstancesCostly duplication of activitiesIncreased motivation of managersBetter information, leading to superior decisionsAnswer: bCostly duplication of activitiesTest Your Knowledge 1Slide 12-8Learning objective 1: Explain the advantages and disadvantages of decentralization, explain why companies evaluate the performance of subunits and subunit managers, and identify cost centers, profit centers, and investment centers.Slide 12-9Evaluating SubunitsEvaluation of subunits is undertaken to identify successful operations and areas needing improvementTop management may perform incremental analysis to determine:Whether a successful operation should be expandedWhether an unsuccessful operation should be eliminated or improvedLearning objective 1: Explain the advantages and disadvantages of decentralization, explain why companies evaluate the performance of subunits and subunit managers, and identify cost centers, profit centers, and investment centers.Slide 12-10Evaluating Subunit ManagersA company evaluates subunit managers in order to motivate them to take actions that maximize the value of the firmReasons for evaluating subunit managers:Identifies successful operations and areas needing improvementInfluences the behavior of managersLearning objective 1: Explain the advantages and disadvantages of decentralization, explain why companies evaluate the performance of subunits and subunit managers, and identify cost centers, profit centers, and investment centers.Slide 12-11Responsibility Accounting and Performance EvaluationResponsibility accounting is a technique that holds managers responsible only for costs and revenues that they can controlThis idea should play a prominent role in the design of accounting systems used to evaluate managersCosts and revenues are traced to the organizational level where they can be controlledLearning objective 1: Explain the advantages and disadvantages of decentralization, explain why companies evaluate the performance of subunits and subunit managers, and identify cost centers, profit centers, and investment centers.Slide 12-12Tracing Costs to Organizational LevelsLearning objective 1: Explain the advantages and disadvantages of decentralization, explain why companies evaluate the performance of subunits and subunit managers, and identify cost centers, profit centers, and investment centers.Slide 12-13Responsibility CentersResponsibility centers are organizational units responsible for the generation of revenue and/or the incurrence of costsResponsibility centers typically are classified as beingCost centersProfit centers, orInvestment centersLearning objective 1: Explain the advantages and disadvantages of decentralization, explain why companies evaluate the performance of subunits and subunit managers, and identify cost centers, profit centers, and investment centers.Slide 12-14Cost CentersA cost center is a subunit that has responsibility for controlling costs but does not have responsibility for generating revenueMost service departments are classified as cost centersThe managers of these departments are responsible for making sure their services are provided at a reasonable cost to the companyLearning objective 1: Explain the advantages and disadvantages of decentralization, explain why companies evaluate the performance of subunits and subunit managers, and identify cost centers, profit centers, and investment centers.Slide 12-15Cost CentersA common approach to controlling cost centers is to compare their actual costs with standard or budgeted costsIf variances from standard are significant, an investigation into the activities of the cost center should be undertaken to determine whether costs are out of controlOther performance measures can be used as wellLearning objective 1: Explain the advantages and disadvantages of decentralization, explain why companies evaluate the performance of subunits and subunit managers, and identify cost centers, profit centers, and investment centers.Slide 12-16Profit CentersA profit center is a subunit that has responsibility for generating revenues as well as for controlling costsBecause both revenues and costs are under the control of the profit center manager, the performance of the profit center can be evaluated in terms of profitabilityThis motivates managers to focus their attention on ways of maximizing profit center profitabilityLearning objective 1: Explain the advantages and disadvantages of decentralization, explain why companies evaluate the performance of subunits and subunit managers, and identify cost centers, profit centers, and investment centers.Slide 12-17Profit CentersCompanies use a variety of methods to profit centersIncome earned in the current year may be compared with an income targetIncome earned may be compared with income earned in the prior yearSome firms use relative performance evaluation, which involves evaluating the profitability of each profit center relative to the profitability of similar profit centersLearning objective 1: Explain the advantages and disadvantages of decentralization, explain why companies evaluate the performance of subunits and subunit managers, and identify cost centers, profit centers, and investment centers.Slide 12-18Investment CentersAn investment center is a subunit that is responsible for generating revenue, controlling costs, and investing in assetsAn investment center is changed with earning income consistent with the amount of assets invested in the segmentLearning objective 1: Explain the advantages and disadvantages of decentralization, explain why companies evaluate the performance of subunits and subunit managers, and identify cost centers, profit centers, and investment centers.Slide 12-19Investment CentersIf the manager can influence decisions affecting investment in divisional assets, the division should be considered an investment centerManagers play a major role in the determining the level of inventory, accounts receivable and equipmentIt seems reasonable to hold them responsible for earning a return on these assetsLearning objective 1: Explain the advantages and disadvantages of decentralization, explain why companies evaluate the performance of subunits and subunit managers, and identify cost centers, profit centers, and investment centers.Slide 12-20An investment center is responsible for:Investing in long term assetsControlling costsGenerating revenuesAll of the aboveAnswer: d. All of the aboveTest Your Knowledge 2Learning objective 1: Explain the advantages and disadvantages of decentralization, explain why companies evaluate the performance of subunits and subunit managers, and identify cost centers, profit centers, and investment centers.Slide 12-21Profit centers are often evaluated using:Investment turnoverIncome targets or profit budgetsReturn on investmentResidual incomeAnswer: b. Income targets or profit budgetsTest Your Knowledge 3Learning objective 1: Explain the advantages and disadvantages of decentralization, explain why companies evaluate the performance of subunits and subunit managers, and identify cost centers, profit centers, and investment centers.Learning objective 2: Calculate and interpret return on investment (ROI), residual income (RI), and economic value added (EVA)Slide 12-22Evaluating Investment Centers With ROIOne of the primary tools for evaluating the performance of investment centers is return on investment, or ROIROI is calculated as the ratio of investment center income to invested capitalFocuses management’s attention on both income (numerator) and the level of investment (denominator)Slide 12-23ROI ComponentsSome companies break ROI into two componentsProfit margin andInvestment turnoverLearning objective 2: Calculate and interpret return on investment (ROI), residual income (RI), and economic value added (EVA)Slide 12-24Measuring Income and Invested Capital for ROIIn calculating ROI, companies measure “income” in a variety of waysNet income, earnings before interest and taxes, controllable profit, etc.Most common method is NOPATNet operating profit after taxesNOPAT excludes interest expense, which is a nonoperating expenseTherefore, add interest expense back to net income and adjust tax expense accordinglyLearning objective 2: Calculate and interpret return on investment (ROI), residual income (RI), and economic value added (EVA)Slide 12-25Measuring Income and Invested Capital for ROIIn calculating ROI, companies measure “invested capital” in a variety of waysCommon approaches includeTotal assetsTotal assets after adding back accumulated depreciationTotal assets less current liabilitiesTotal assets less non-interest-bearing current liabilities (method used in this textbook)Learning objective 2: Calculate and interpret return on investment (ROI), residual income (RI), and economic value added (EVA)Slide 12-26NOPAT ExampleLearning objective 2: Calculate and interpret return on investment (ROI), residual income (RI), and economic value added (EVA)Slide 12-27ROI – France, Germany, and JapanLearning objective 2: Calculate and interpret return on investment (ROI), residual income (RI), and economic value added (EVA)Slide 12-28Information for Davenport MillsNet income $16,000,000Interest expense $1,300,000Tax rate 40%Total assets $225,000,000Current liabilities $45,000,000 of which $30,00,000 are non-interest bearingCalculate NOPAT= Net income + interest expense (1 - tax rate) = $16,000,000 + $1,300,000 (1 - .40) = $16,780,000Test Your Knowledge 4Learning objective 2: Calculate and interpret return on investment (ROI), residual income (RI), and economic value added (EVA)Slide 12-29Information for Davenport MillsNet income $16,000,000Interest expense $1,300,000Tax rate 40%Total assets $225,000,000Current liabilities $45,000,000 of which $30,00,000 are non-interest bearingCalculate invested capital= Total assets – non-interest-bearing current liabilities = $225,000,000 - $30,000,000 = $195,000,000Test Your Knowledge 5Learning objective 2: Calculate and interpret return on investment (ROI), residual income (RI), and economic value added (EVA)Slide 12-30Information for Davenport MillsNet income $16,000,000Interest expense $1,300,000Tax rate 40%Total assets $225,000,000Current liabilities $45,000,000 of which $30,00,000 are non-interest bearingCalculate ROI= NOPAT ÷ Invested capital= $16,780,000 ÷ $195,000,000 = 8.605%Test Your Knowledge 6Learning objective 2: Calculate and interpret return on investment (ROI), residual income (RI), and economic value added (EVA)Slide 12-31Calculating ROILearning objective 2: Calculate and interpret return on investment (ROI), residual income (RI), and economic value added (EVA)Slide 12-32Problems with Using ROIInvested capital is typically based on historical costs Fully depreciated assets lead to a low invested capital number resulting in high ROIThis makes comparison of investment centers using ROI difficultLearning objective 2: Calculate and interpret return on investment (ROI), residual income (RI), and economic value added (EVA)Slide 12-33Problems with Using ROIManagers may put off purchase of new equipment, which may lead to under investmentProjects with positive net present value but low initial profitability might not be undertakenManagers with high ROI may consider the effect on ROI, rather than NPVLearning objective 2: Calculate and interpret return on investment (ROI), residual income (RI), and economic value added (EVA)Slide 12-34Problems of Overinvestment and UnderinvestmentWe would like managers to invest in assets that earn a return in excess of the cost of capitalIf we evaluate managers in terms of growth in profit, they may be motivated to make investments that earn a return that is less than the cost of capitalThis is called overinvestment in assetsLearning objective 2: Calculate and interpret return on investment (ROI), residual income (RI), and economic value added (EVA)Slide 12-35Problems of Overinvestment and UnderinvestmentAn obvious solution is to evaluate managers in terms of ROIManagers won’t be motivated to take on projects with a low return just to increase profitsROI can lead managers to underinvest, that is they may pass up projects that earn a return that is greater than the cost of capitalLearning objective 2: Calculate and interpret return on investment (ROI), residual income (RI), and economic value added (EVA)Slide 12-36Use of profit as a performance measure:May lead to overinvestment in assetsIs appropriate for an investment centerIs appropriate as long as profit is calculated using GAAPEncourages managers to finance operations with debt rather than equityAnswer: a. May lead to overinvestment in assetsTest Your Knowledge 7Learning objective 2: Calculate and interpret return on investment (ROI), residual income (RI), and economic value added (EVA)Slide 12-37Decision MakingLearning objective 2: Calculate and interpret return on investment (ROI), residual income (RI), and economic value added (EVA)Slide 12-38Evaluation Using Economic Value Added (EVA)An approach to solving overinvestment and underinvestment problems involves the use of a performance measure known as economic value added (EVA)Firms that use EVA typically tie bonus compensation to the measureThus, managers become very focused on achieving high levels of EVALearning objective 2: Calculate and interpret return on investment (ROI), residual income (RI), and economic value added (EVA)Slide 12-39Residual Income (RI)Residual income (RI) is the net operating profit after taxes of an investment center in excess of its required profitThe required profit is equal to the investment center’s required rate of return times the level of investment in the centerRI = NOPAT – Required ProfitLearning objective 2: Calculate and interpret return on investment (ROI), residual income (RI), and economic value added (EVA)Slide 12-40Residual IncomeNIBCL = non-interest bearing current liabilitiesLearning objective 2: Calculate and interpret return on investment (ROI), residual income (RI), and economic value added (EVA)Slide 12-41Economic Value Added (EVA) Learning objective 2: Calculate and interpret return on investment (ROI), residual income (RI), and economic value added (EVA)Slide 12-42Investment centers are often evaluated using:Standard cost variancesReturn on investmentResidual income/EVABoth b and cAnswer: dBoth b and cTest Your Knowledge 8Learning objective 2: Calculate and interpret return on investment (ROI), residual income (RI), and economic value added (EVA)Slide 12-43Economic Value Added (EVA)Learning objective 2: Calculate and interpret return on investment (ROI), residual income (RI), and economic value added (EVA)Learning objective 3: Explain the potential benefits of using a balanced scorecard to assess performance, and discuss how a strategy map can be used to communicate the linkages among the measures in a balanced scorecard.Slide 12-44Using a Balanced Scorecard to Evaluate PerformanceA problem in using financial measures like ROI and EVA is that they are “backward looking”Slide 12-45Using a Balanced Scorecard to Evaluate PerformanceA problem with assessing performance with measures like profit, ROI and EVA is that these measures are all backward lookingThe balanced scorecard is an approach to performance measurement that also focuses on what managers are doing today to create future shareholder valueLearning objective 3: Explain the potential benefits of using a balanced scorecard to assess performance, and discuss how a strategy map can be used to communicate the linkages among the measures in a balanced scorecard.Slide 12-46Balanced ScorecardThe balanced scorecard is constructed for four dimensions of performanceFinancialHaving financial measures is critical even if they are backward lookingCustomerExamines the company’s success in meeting customer expectationsLearning objective 3: Explain the potential benefits of using a balanced scorecard to assess performance, and discuss how a strategy map can be used to communicate the linkages among the measures in a balanced scorecard.Slide 12-47Balanced ScorecardThe balanced scorecard is constructed for four dimensions of performanceInternal ProcessesExamines the company’s success in improving critical business processesLearning and growth Examines the company’s success in improving its ability to adapt, innovate, and growLearning objective 3: Explain the potential benefits of using a balanced scorecard to assess performance, and discuss how a strategy map can be used to communicate the linkages among the measures in a balanced scorecard.Slide 12-48Tying the Balanced Scorecard Measures to the Strategy for SuccessTypically, a company will develop three to five performance measures for each dimensionWhere possible, measures should be tied to the company’s strategy for successBalance among the dimensions is criticalYou get what you measure!Companies need measures that drive desirable behaviorsLearning objective 3: Explain the potential benefits of using a balanced scorecard to assess performance, and discuss how a strategy map can be used to communicate the linkages among the measures in a balanced scorecard.Slide 12-49Balanced ScorecardLearning objective 3: Explain the potential benefits of using a balanced scorecard to assess performance, and discuss how a strategy map can be used to communicate the linkages among the measures in a balanced scorecard.Slide 12-50How Balance is Achieved in a Balanced ScorecardPerformance is assessed across a balanced set of dimensionsQuantitative measures are balanced with qualitative measuresThere is a balance of backward-looking measures and forward-looking measuresLearning objective 3: Explain the potential benefits of using a balanced scorecard to assess performance, and discuss how a strategy map can be used to communicate the linkages among the measures in a balanced scorecard.Slide 12-51Balanced ScorecardLearning objective 3: Explain the potential benefits of using a balanced scorecard to assess performance, and discuss how a strategy map can be used to communicate the linkages among the measures in a balanced scorecard.Slide 12-52Balanced ScorecardLearning objective 3: Explain the potential benefits of using a balanced scorecard to assess performance, and discuss how a strategy map can be used to communicate the linkages among the measures in a balanced scorecard.Slide 12-53You Get What You MeasureLearning objective 3: Explain the potential benefits of using a balanced scorecard to assess performance, and discuss how a strategy map can be used to communicate the linkages among the measures in a balanced scorecard.Slide 12-54Developing a Strategy Map for a Balanced ScorecardA strategy map is a diagram of the relationships of the strategic objectives across the four dimensions of the balanced scorecardIt is useful to test the soundness of the strategy and how the strategy is linked to measures on the scorecardIt is useful to communicates strategic objectives to employeesLearning objective 3: Explain the potential benefits of using a balanced scorecard to assess performance, and discuss how a strategy map can be used to communicate the linkages among the measures in a balanced scorecard.Slide 12-55Strategy Map ExampleLearning objective 3: Explain the potential benefits of using a balanced scorecard to assess performance, and discuss how a strategy map can be used to communicate the linkages among the measures in a balanced scorecard.Slide 12-56Keys to a Successful Balanced ScorecardTargets For each measure, there should be a target so managers know what they are expected to achieveInitiativesFor each measure, the company must identify actions that will be taken to achieve the targetLearning objective 3: Explain the potential benefits of using a balanced scorecard to assess performance, and discuss how a strategy map can be used to communicate the linkages among the measures in a balanced scorecard.Slide 12-57Keys to a Successful Balanced ScorecardResponsibilityA specific employee must be given responsibility/accountability for the implementation of each initiativeFundingInitiatives must be funded appropriatelyTop Management SupportIt is crucial to have the full support of top managementLearning objective 3: Explain the potential benefits of using a balanced scorecard to assess performance, and discuss how a strategy map can be used to communicate the linkages among the measures in a balanced scorecard.Slide 12-58Keys to a Successful Balanced ScorecardLearning objective 3: Explain the potential benefits of using a balanced scorecard to assess performance, and discuss how a strategy map can be used to communicate the linkages among the measures in a balanced scorecard.Slide 12-59EvaluationLearning objective 3: Explain the potential benefits of using a balanced scorecard to assess performance, and discuss how a strategy map can be used to communicate the linkages among the measures in a balanced scorecard.Learning objective A1: Discuss the use of market price, variable cost, full cost plus profit, and negotiation in setting transfer prices.Slide 12-60Appendix - Transfer PricingThe transfer price is the price that is used to value internal transfers of goods or servicesFor external financial reporting purposes, a company cannot recognize revenue on the sale of goods between responsibility centers within the firmThe revenue has not been realizedSlide 12-61Methods of Setting the Transfer PriceIn practice, a number of different approaches are taken to setting transfer pricesMarket priceVariable costsFull cost plus profitNegotiated pricesLearning objective A1: Discuss the use of market price, variable cost, full cost plus profit, and negotiation in setting transfer prices.Slide 12-62Methods of Setting the Transfer PriceThe most appropriate transfer price depends on the circumstancesShould lead subunit managers to make decisions that maximize firm valueSince there is no arm’s length transaction, revenue is not recognized for financial reporting purposesMotivation of best decision is measured by opportunity cost of producing an item and transferring it inside the companyLearning objective A1: Discuss the use of market price, variable cost, full cost plus profit, and negotiation in setting transfer prices.Slide 12-63Lowering Transfer Price Below the Market PriceLearning objective A1: Discuss the use of market price, variable cost, full cost plus profit, and negotiation in setting transfer prices.Slide 12-64Transfer PricingLearning objective A1: Discuss the use of market price, variable cost, full cost plus profit, and negotiation in setting transfer prices.Slide 12-65Copyright © 2016 John Wiley & Sons, Inc. 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