Ch 11 Flashcards
Responsibility center
Used for any part of organization whose manager has
Control over and is accountable for cost, profit, investments
Decentralized organization
Decision making authority is spread throughout
The organization rather than being confined
To a few top executives
Cost center, 5 examples?
Has control over costs, but not
revenue or use of investment funds
Ex. Accounting, finance, general administration, legal,
Personnel
Profit center, example 1?
Has control over both costs and revenue, but not
Over investment funds
Ex. Manager in charge of six flags amusement park
Investment center, example 1?
Has control over cost, revenue and investments
In operating assets
Ex. Vice president of manufacturing at General Motors
Return on investment (ROI), 2 equations?
ROI = (net operating income)/(average operating assets)
ROI = margin X turnover
The higher the business segment’s ROI, the greater
The profit earned per dollar invested in the segments
Operating assets
Net operating income (EBIT)
Income before interest and taxes
EBIT = earnings before interest and taxes
Operating assets
Include cash, A/R, inventory, plant and equipment
And all other assets held for operating purposes
Margin
Margin = (Net operating income)/(sales)
Turnover
Turnover = (sales)/(average operating assets)
2 approaches to measure and investment center’s performance?
Residual income, ROI
Residual income
Residual income = (net operating income)
- (average operating assets X minimum required rate of return)
Economic value added (EVA), objective? 1 example?
Adaption of residual income, where companies modify
Their accounting principles
Objective is to maximize EVA
Ex. Funds used for research and development are
treated as investments instead of expenses
Delivery cycle time
Amount of time from when a customer order is received
To when completed order is shipped
Through put time AKA Manufacturing cycle time
Amount of time required to turn raw materials into
completed products
Manufacturing cycle efficiency (MCE)
MCE = value-added time (AKA process time)/throughput time
.15 MCE means that 85% of total time on unit is spent
On activities that do not add value to product
Value added activity
Process time = amount of work actually done on product
Non-value added time activities?
Wait time
Inspection time
Move time
Queue time
Balanced scorecard
Consists of integrated set of performance measures
That are derived from and support a company’s strategy
Transfer price
Price charged when one segment of a company
Provides goods or services to another segment of
Same company
Suboptimization
When managers don’t act in best interest of company
Or even their own division
Negotiated transfer price, 2 advantages?
Results from discussions btw selling and buying divisions
1) Preserves autonomy of divisions and consistent
of Spirit of decentralization
2) managers of affected divisions have better cost
And benefit info
Range of acceptable transfer prices
Range of transfer prices where profits of both divisions
Participating in transfer would increase
Market price
Price charged for an item on the open market
Operating departments
The central purpose of organization carried out in
Operating department
Service departments
Don’t engage in operating activities
They provide services or assistance to
Operating departments
