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Chapter 11

Decentralization spreads decision-making authority across an organization rather than concentrating it among top executives, which can increase motivation and job satisfaction among employees while allowing managers to gain experience. A cost center's manager controls costs but not revenues or investments, a profit center's manager controls costs and revenues but not investments, and an investment center's manager controls costs, revenues, and investments. Margin is net operating income divided by sales and turnover is sales divided by average operating assets in ROI calculations. Residual income is net operating income minus the product of average operating assets and the minimum required rate of return. Using only ROI can lead to rejecting profitable investments, but residual income considers whether the return exceeds the minimum required rate.

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143 views3 pages

Chapter 11

Decentralization spreads decision-making authority across an organization rather than concentrating it among top executives, which can increase motivation and job satisfaction among employees while allowing managers to gain experience. A cost center's manager controls costs but not revenues or investments, a profit center's manager controls costs and revenues but not investments, and an investment center's manager controls costs, revenues, and investments. Margin is net operating income divided by sales and turnover is sales divided by average operating assets in ROI calculations. Residual income is net operating income minus the product of average operating assets and the minimum required rate of return. Using only ROI can lead to rejecting profitable investments, but residual income considers whether the return exceeds the minimum required rate.

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RINCONADA Reynalyn
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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RINCONADA, REYNALYN B.

BSA-3

11–1 What is meant by the term decentralization?

Answer: Decentralization spreads decision-making authority across an entire organization, rather


than being confined to a few top executives.

11–2 What benefits result from decentralization?

Answer: • It allows top management to concentrate on strategy, higher-level decision-making,


and coordinating activities.

• It often increases motivation among employees, resulting in increased job satisfaction and
retention, as well as improved performance.

• It gives lower-level managers a chance to gain experience they can use as they attempt to gain
higher-level positions.

11–3 Distinguish between a cost center, a profit center, and an investment center.

Answer: • Cost center: a business segment whose manger has control over cost but has no
control over revenue or investments in operating.

• Profit center: a business segment whose manager has control over cost and revenue but has no
control over investments in operating assets.

• Investment center: a business segment whose manager has control over cost, revenue, and
investments in operating assets.

11–4 What is meant by the terms margin and turnover in ROI calculations?

Answer: ROI = margin x turnover

In ROI calculations:

• Margin = Net Operating Income divided by Sales

• Turnover = Sales divided by Average Operating Assets

11–5 What is meant by residual income?


Answer: Residual income = net operating income - (average operating assets x minimum
required rate of return)

11–6 In what way can the use of ROI as a performance measure for investment centers lead
to bad decisions? How does the residual income approach overcome this problem?

Answer: Using ROI to evaluate performance can lead to bad decisions because if a manager of
an investment center were to reject a profitable investment opportunity whose rate of return
exceeds the company's required rate of return but whose rate of return is less than the investment
center's current ROI. The residual income approach overcomes this problem because any project
whose rate of return exceeds the company's minimum required rate of return will result in an
increase in residual income.

11–7 What is the difference between delivery cycle time and throughput time? What four
elements make up throughput time? What elements of throughput time are value-added
and what elements are non–value-added?

Answer: Delivery cycle time is the elapsed time from when a customer order is received until the
finished goods are shipped. Throughout time is the elapsed time from when production is started
until finished goods are shipped.

11–8 What does a manufacturing cycle efficiency (MCE) of less than 1 mean? How would
you interpret an MCE of 0.40?

Answer: An MCE of less than 1 means that the production process includes non-value added
time. An MCE of 0.40 means that 40% of throughput time consists of actual processing, while
the other 60% consists of moving, inspection, and other non-value-added activities.

11–9 Why do the measures used in a balanced scorecard differ from company to
company?

Answer: A company's balanced scorecard differs from company to company because it is based
on and supports each company's strategy. Since each company's strategy is different, their
balanced scorecards differ.

11–10 Why does the balanced scorecard include financial performance measures as well as
measures of how well internal business processes are doing?
Answer: The balanced scorecard is put together to support the organization's strategy, which is
used to further the company's goals. Both of these measures are included in order to fully
understand how a business is doing and how effective their strategy is.

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