Divisionalisation and performance evaluation measures Flashcards
What is functional structure (Centralisation)?
All activities of a similar type are placed under the control of a departmental head.
What is divisionalised structure (Decentralisation)?
Divided into separate investment or profit centres according to products services, decentralising decision-making
Advantages of Divisionalisation
- Improved quality of decisions
- Increased managerial motivation
Disadvantages of Divisionalisation
- Sub-optimisation and lack of goal congruence
- More costly to operate
What are the three main types of responsibility centres?
- Cost Centre
- Profit Centre
- Investment Centre
What do managers of cost centres control and how is their performance measured?
Managers control controllable costs, and performance is measured using variance analysis and efficiency measures.
What do managers of revenue centres control, and what is the principal performance measure?
Managers control revenues only, and performance is measured by revenues.
What are profit centre managers responsible for, and how is performance measured?
Managers control costs and sales prices, with performance measured by profit.
What are investment centre managers responsible for?
They control costs, sales price, output volumes, and investments, with performance measured by ROI, RI, and EVA.
What is controllability principle?
Managers should be assessed only be the costs they control. If they cannot control quantity or price, they should not be held responsible.
What are the three relative profitability measures for divisional performance?
Return on Investment (ROI)
Residual Income (RI)
Economic Value Added (EVA)
How is ROI calculated?
ROI = (Profit / Capital Employed) x 100%
Strengths of ROI
- Readily calculated
- Relative measure, easily understood
Weakness of ROI
- Can discourage new investment
- Unfair if profit measured after uncontrollable costs
How is RI calculated
RI = Operating Profit - (Capital Employed x Cost of Capital %)
