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ACCT 2230 (113)

Managerial Accounting Chapter Eleven Notes

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ACCT 2230
Elliot Currie

Chapter ElevenReporting for Control y Decentralization in Organizations o In a decentralized organization decision making is spread through the organization rather than being confined to a few top executiveso Decentralization and Segment ReportingEffective decentralization requires segment reporting to permit and analysis the evaluation of the decisions made by the segment managersy Cost Profit and Investment Centres o A responsibility centre is broadly defined as any part of an organization whose manager has control over and is accountable for cost profit or investmentso The three primary types of responsibility centres are cost centres profit centres and investment centreso Organizations categorize responsibility centres into one of these three types based on the managers authority to control cost revenue and investment fundso Cost CentreA cost centre is a business segment whose manager has control over costs but not over revenue or investment fundsThe managers of cost centres are expected to minimized cost while providing the level of services or the amount of products demanded by the other parts of the organizationo Profit CentreA profit centre is any business segment whose manager has control over both cost and revenue A profit centre manager generally does not have control over investment funds Profit centre managers are often evaluated by comparing actual profit to targeted or budgeted profito Investment CentreAn investment centre is any segment of an organization whose manager has control over cost revenue and investments in operating assetsy Transfer Pricing o A transfer price is the price charged when one segment sells goods or services to another segment of the same companyo Because the dollar amount of these transfers can be very large the transfer price at which they occur can have a significant impact on the profits of both the buying and selling segment As a result managers are intensely interested in how transfer prices are seto Three common approaches are used to set transfer pricesAllow the managers involved in the transfer to negotiate their own transfer pricesSet transfer prices at cost using either variable cost or full absorption costSet transfer prices at the market priceo The fundamental objective in setting transfer prices is to motivate the managers to act in the best interests of the overall companyo Suboptimization occurs when managers do not act in the best interests of the overall company or even in the best interest of their own segmento Negotiated Transfer Price
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