C. Managing and controlling the performance of organisational units Flashcards
what does decentralisation seek to overcome?
aka divisionalisation
the problem of managing a large organisation by creating a structure based on several autonomous decision-making units
what are the objectives of decentralisation?
ensure goal congruence
increase motivation of management
reduce head office bureaucracy
provide better training for junior and middle management
what is the major disadvantage of dividionalisation?
dysfunctional decision making i.e in their own best interest
can be overcome with a suitable system of performance evaluation or responsibility centres
what is responsibility accounting?
a specific manager takes responsibility for a particular aspect of the budget. the are then accountable for actual performance in their area of responsibility
what is a responsibility centre?
the area of operations for which a manager is responsible
-usually a hierarchy of responsibility centres
what is a cost centre?
production or service location, function, activity or item of equipment for which costs are accumulated
- could be large or small
goal: minimise costs
what is a revenue centre?
responsibility centre that is devoted to raising revenue (or generating sales) without any link to the associated costs
might be encountered in the NFP sector or in marketing/sales operation of an org
goal:generate revenues
what is a profit centre?
if manager is responsible for the revenue as well as costs as they are held accountable for the profitability of the operations she is accountable for
- could be several cost centres
goal: maximise profit
what is an investment centre?
if a manager is responsible for the investment decisions i.e return on investments as well as the profitability of the devisions
- could be several profit centres
goal: maximise rate of return on assets
what are the consequences of structuring the departments as profit centres?
- improved DECISION MAKING due to local knowledge
- departmental managers will become more MOTIVATED and AUTONOMOUS
- senior management will find the new structure more TIME-CONSUMING to handle
- possible LOSS OF CONTROL from senior management
- dysfunctional decision making
- DUPLICATION of functions and costs
what is a controllable cost?
one which can be influenced by its budget holder
-variable and directly attributable fixed costs i.e can be avoided in shutdown decision s they are fully allocated to a cost centre
what is the difference between a committed fixed cost and discretionary fixed cost?
committed: can’t be changed in short term
discretionary: can be cut down
what is a manager responsible for if the principle of controllability is applied?
a manager should be made responsible and accountable only for the costs and revenues that he or she is in a position to control
why are some variable costs unable to be influences by managers in the short term?
direct labour is not entirely controllable for salaried jobs in the short term
what are the advantages to controllability in responsibility accounting?
- profit centre managers are made aware of the SIGNIFICANCE of other overhead costs
- profit centre managers are made aware that they need to earn a SUFFICIENT PROFIT to cover a fair share of other overhead costs
what are the disadvantages of controllability in responsibility accounting?
- profit centre managers are made accountable for a share of other overhead costs, but they can do nothing to CONTROL them
- the APPORTIONMENT of other overhead costs between profit centres, like overhead apportionment generally, is usually a matter of judgement, lacking any economic or commercial justification
what are some profitability KPIs?
ROCE = profit margin x asset turnover
what are the equations for the profitability KPIs?
ROCE= PBIT/ capital employed
profit margin = PBIT / turnover
asset turnover = turnover / capital employed
capital employed = equity + LT finance
what are the 2 liquidity ratios?
current ratio = CA/CL
acid test or quick ratio: CA-inv/ CL
what does ROCE show?
operating profit generated from capital employed i.e asset base
why is a higher ROCE desirable?
more value for money for shareholders
-can be understood between by calculating profit margin and asset turnover
what does the operating profit margin show?
how well indirect costs of business are being managed
- compare to gross profit margin, if in line then profit is issue
- either prices too low or costs too high
what does the asset turnover show?
how efficiently management have utilised assets to generate revenue
what are liquid assets?
- cash
- short-term investments that can be readily sold if the need arises
- liquidity is improved by unused bank borrowing facilities