Chapter 8 - Responsibility Centres

Question 1

Obective of decentralisation?

Answer 1

Goal congruence
increase motivation management
reduce head office bureaucracy
better training junior/middle management

Question 2

Main disadvantage of decentralisation?

Answer 2

dysfunctional decision making (divisions looking after their own best only).

Question 3

Introduction responsibility centres can help solve problem. Which objectives do they have?

Answer 3

promote goal congruence
encourage motivation and initiative
provide feedback to management
encourage long-term views

Question 4

Which four types of responsibility centres are there?

Answer 4

Cost centre (no direct incentive for quality (don’t make IT a costcentre).

Revenue centre

Profit centre

Investment centre

Question 5

Controllability of costs. What is a controllable cost?

Answer 5

Variable & directly attributable fixed costs (costs which can be influenced).

Question 6

How can fixed costs be split in terms of controllability?

Answer 6

Committed and discretionary fixed costs. The latter being more controllable in the short term (e.g. advertising or travel)

Question 7

What is the main critisism on controllability of costs?

Answer 7

managers are not encouraged to think about costs for which they are not responsible. Therefore, some argue profit centre managers should be made accountable for share of overheads.

Question 8

What are pros and cons of making profit centre managers accountable for share of overhead?

Answer 8

made aware of significance
made aware they need to earn sufficient profit

not controllable
apportionment is matter of judgement and therefore lacks justification and can demotivate.

Question 9

Which financial key performance indicators exist?

Answer 9

profitability (dupont)
liquidity
asset turnover

Question 10

Which are the three key profitability metrics?

Answer 10

1) Profit/Turnover (profit margin)
2) Turnover/Capital Employed (asset turnover)
3) Profit/Capital Employed (ROCE), use opening capital if not otherwise stated.

1 x 2 = 3

Profit Margin x asset turnover = ROCE

Question 11

What are liquidity ratios?

Answer 11

Current ratio (current assets / current liabilities)
Quick ratio (current assets - inventory) / current liabilities

Current below 2 or quick below 1 might be considered low but varies between industries!