Unit 9 Study Guide: Performance Evaluation

9a: Define decentralized organization and explain the advantages and disadvantages of decentralizing.

As they grow, companies often decide to decentralize their organizational structure to give individual segments within their operation more decision making authority.

    • Name some advantages and disadvantages for decentralizing company operations.

Review Using Decentralized Organizations to Control Operations from Managerial Accounting.

9b: Differentiate among the three types of responsibility centers.

Within a responsibility center, a manager is only responsible for the costs, assets, and revenues they can control.

    • Cost centers are accountable for incurring costs, but are not responsible for generating revenue or making investments. Name some examples of organizational cost centers.
    • Profit centers are accountable for generating profits by controlling costs and revenues, but are not responsible for making investments. Name some examples of organizational profit centers.
    • Investment centers are accountable for generating profits by controlling revenues, costs, and making company investments. Name some examples of organizational investment centers.

Review Maintaining Control over Decentralized Organizations from Managerial Accounting.

9c: Explain responsibility accounting and why it is useful for a decentralized organization.

Responsibility accounting holds responsibility centers accountable for varying levels of profits and investments.

    • What measures do managers use to evaluate the performance for each of the three responsibility centers?

Review Maintaining Control over Decentralized Organizations from Managerial Accounting.

9d: Calculate and interpret segmented net income to evaluate performance.

An investment center is responsible for generating revenue, incurring costs, and making company investments. Many corporations have multiple investment centers that tracks revenues, costs, and investments in assets within each investment center. The division of investment centers creates segmented net income which isolates the revenues, costs, and investments in assets to individual centers.

    • Define segmented net income.
    • What is the calculation for segmented income?
    • Identify some weaknesses of reporting segmented income.

Review Comparing Segmented Income for Investment Centers from Managerial Accounting.

Figure 11.3 Segmented Income Statements (Game Products, Inc.)

Figure 11.3 "Segmented Income Statements (Game Products, Inc.)

9e: Calculate and interpret return on investment (ROI) to evaluate performance.

A manager calculates a company's return on investment (ROI) by dividing operating income by average operating assets.

    • Define operating income.
    • How do managers calculate average operating assets?
    • How do managers use a segmented balance sheet to calculate return on investment (ROI) for company segments?
    • List some various ways for calculating ROI.

Managers evaluate the strengths and weaknesses of company divisions by breaking return on investment (ROI) down into two separate measures.

    • Define operating profit margin and asset turnover.
    • How do managers calculate operating profit margin?
    • How do managers calculate asset turnover?
    • How do managers use operating profit margin and asset turnover evaluate the effectiveness of company divisions?

Review Using Return on Investment (ROI) to Evaluate Performance from Managerial Accounting.

9f: Calculate and interpret residual income (RI) to evaluate performance.

Residual income describes excess divisional operating profit, as compared to the divisional cost of purchasing capital assets.

    • Define residual income.
    • Why do companies use residual income to measure divisional performance?
    • How do managers use percent cost of capital, as a cost for purchasing capital assets?
    • What are some disadvantages of using residual income to compare divisions.

Review Using Residual Income (RI) to Evaluate Performance from Managerial Accounting.

Unit 9 Vocabulary

      • Asset turnover
      • Average operating assets
      • Cost center
      • Decentralized organizations
      • Gross book value
      • Investment center
      • Net book value
      • Operating income
      • Percent cost of capital
      • Profit center
      • Responsibility centers
      • Return on investment
      • Segmented income
Last modified: Wednesday, July 17, 2019, 5:45 PM