Chapter 5 Accounting Module

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Western University
Management and Organizational Studies
Management and Organizational Studies 1023A/B
Maria Ferraro

MOS- Chapter 5 Performance Evaluation in Decentralized Organizations Decentralization of Decision-Making • organizations have no choice but to decentralize by giving lower-level manager the authority to make specified decisions Benefits and Costs of Decentralization BENEFITS OF DECENTRALIZATION 1. Permits timely decisions with the best available information 2. Tailors managerial skills and specializations to job requirements • delegating decision-making to individuals with appropriate functional experience enhances decision quality 3. Empowers employees and increases job satisfaction 4. Trains future managers • a well-managed organization develops and maintains a pool of managerial talent COSTS OF DECENTRALIZATION 1. Leads to decisions that emphasize local goals over global goals 2. Requires costly coordination of decisions • decentralized organizations requires careful coordination of the decisions by managers at various levels 3. Triggers improper decisions because of the divergence between individual and organizational goals • managers might pursue their own objectives instead of acting in the organization’s best interests 4. May lead to an increase in total costs • effort and tasks are often duplicated • top management’s responsibility is to figure out how to maximize the benefits and minimize the costs associated with decentralization • organizations use monitoring, performance evaluation, and incentive schemes to manage these costs Responsibility Centres • each these organizational subunits corresponds to the nature of the decisions made by the managers of the subunits COST CENTRES • managers exercise control over costs, but not revenues • minimize the cost of producing a specified level of output or the cost of delivering a specified level of service • objective of cost centre managers is to improve the efficiency of operations • examples are plant maintenance, data procession, human resources, production and general administration REVENUE CENTRES • managers exercise control over revenues • may also be responsible for some expenses, responsible for expenses associated with selling • examples are sales divisions PROFIT CENTRES • managers focus on profit • their goal is to both minimize costs and maximize revenues INVESTMENT CENTRES • make decisions that influence costs, revenues and investments • maximize the returns from invested capital, or to put the capital invested by owners and shareholders of their organizations to the most profitable use • organizations need effective performance measurement systems to evaluate the decisions of various responsibility centres Principles of Performance Measurement • controllable performance measure reflects the consequences of the actions taken by the decision maker • hold decision makers accountable only for the costs and benefits that they can control • informativeness principle- a performance measure is informative if it provides information about a manager’s effort, even if the manager does not have control over it • most controllable measures are informative • evaluating a firm relative to other firms in the industry, or relative performance evaluations, is useful Characteristics of Effective Performance Measures An ideal performance measure • aligns employee and organizational goals • yields maximum information about the decisions or actions of the individual or organizational unit • is easy to measure • is easy to understand and communicate • a single performance measure rarely possesses all of these characteristics • to make effective tradeoffs among the attributes, organizations often use a combination of performance measures Evaluating Cost and Profit Centres • cost centre managers serve two roles in organizations achieving cost targets for a given level of output in the short term and making continuous efficiency improvements to cut costs in the long term • in the short term, organizations typically use budget variances to measure cost centre performance • operating budgets to specify the resources needed to achieve a targeted level of output or service for the plan period Long-Term Measures • benchmarking- a process that involves comparing the effectiveness and efficiency of various activities and business processes in a firm against the best practice in the industry • kaizen- a philosophy of continuous improvement, one way to implement continuous improvement is to hold managers accountable for achieving permanent cost reductions Discretionary Cost Centres • the above discussion focuses on evaluating cost centres for which there is a clear relation between inputs and outputs, which are engineered cost centres • discret
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