decentralisation and transfer pricing Flashcards
what is decentralisation?
- the delegation of decision making authority throughout an organisation by allowing managers at various operating levels the authority to make decisions relating to their area of responsibility
describe a decentralised organisation
the more the responsibility is passed downwards and outwards to other people, the more we say an organisation is decentralised
describe a centralised organisation
where responsibility remains largely within a small group of very senior people
advantages of a decentralised organisation
- top management freed to concentrate on strategy
- lower-level managers gain experience in decision making
- decision-making authority may increase in job satisfaction
- lower-level decisions often based on better information
- lower-level managers can respond quickly to changes in their business environments
disadvantages to a decentralised organisation
- there may be a lack of coordination amongst autonomous managers
- lower-level managers may make a decision without seeing the “bigger picture”
- lower-level manager’s objectives may not be those of the organisation
- may be difficult to spread innovative ideas in the organisation
explain decentralisation and responsibility centres
since decentralised organisations delegate decision-making responsibility to lower-level managers, they need responsibility accounting systems that link lower-level managers’ decision-making authority with accountability for the outcomes of those decisions
- in order for a responsibility accounting system to be implemented within an organisation, this organisation should be divided into responsibility centres
what are responsibility centres?
any part of an organisation whose manager has control over and is accountable for its costs, revenues, profits or investments
what are the four main types of responsibility centres?
- cost or expense centres
- revenue centres
- profit centres
- investment centres
what is a cost centre?
centres whose manager has control over costs only
(e.g. service deparments - such as accounting, finance, general admin)
what are managers of cost centres responsible for?
they are expected to minimise costs while providing the level of products and services demanded by other parts of the organisation
how is the performance of cost centres evaluated?
by comparing their actual costs with how much costs should have been for their actual level of production (i.e. their flexible budget)
what are revenue centres?
centres where managers are accountable to the financial output associated with generating sales (or, more specifically, sales revenue)
- e.g. a divisional sales manager for a soft drinks distribution company in Italy (responsible for sales revenue earned in that sales region)
- technically revenue centres may also be held accountable for some selling expenses (e.g. sales people salaries and bonuses)
- but revenue will not be accountable for the cost of goods or services sold
what are profit centres?
responsible for both cost and revenue centres (profit = sales revenue - cost) but not over investment funds !
what are managers of profit centres responsible for?
managers have authority to establish and change selling prices, choose the markets to target and the mix of products or services to prioritise, select the main suppliers, and more
how are profit centres evaluated?
by profit and profit-related measures
