1. Evaluation of Investment Centers Managerial Accounting Prepared by Diane Tanner University of North Florida Chapter 24

2. Responsibility Accounting  A concept that separates a company into responsibility segments to enable a more efficient way to manage a large organization  A segment is a responsibility center within a company  Can be any part or activity of an organization about which upper level managers want to track costs, revenue, or profit data  Each segment manager is given responsibilities to control the segment 2 By geographical region A Product line A Store or Service Area

3. Forms of Segment Control  Decentralization  The process of ‘pushing’ decision-making down to those closer to the actual work as they are in the best position to do it  Centralization  A few individuals at the top of an organization retain decision-making authority  Delegation to lower-level managers gives little control to lower levels

4. Advantages of Decentralization 1.Better decisions can be made by those who do the work 2.Faster decisions can be made by those who do the work 3.Managers are motivated 4.Great training to enable lower level managers to move up the ladder more quickly

5. Disadvantages of Decentralization 1.Some work is duplicated creating additional costs 2.Lack of goal congruence I.e., the goals of the manager differ from the goals of the company

6. Controlling under Decentralization  Performance evaluation is a key responsibility of managers at all levels  Top management must evaluate lower-level managers who have been given authority to make decisions  Benefits of performance evaluation To control the work that is being performed To influence a manager's behavior through enhancement of employee motivation, commitment, and productivity To identify goals and objectives for the employee To identify process improvement opportunities

7. Responsibility Centers Cost Center A segment whose manager has control over only costs. Cost Center A segment whose manager has control over only costs. Cost Profit Center A segment whose manager has control over both costs and revenues. Profit Center A segment whose manager has control over both costs and revenues. Revenues Sales Costs Salaries Rent Investment Center A segment whose manager has control over costs, revenues, and investments in operating assets. Investment Center A segment whose manager has control over costs, revenues, and investments in operating assets. Each center has a different performance evaluation focus because respective managers are responsible for different business segments. Each center has a different performance evaluation focus because respective managers are responsible for different business segments. Revenue Center A segment whose manager has control over revenues. Revenue Center A segment whose manager has control over revenues.

8. Performance Evaluation of Investment Centers  Managerial goal  To maximize return on investment for shareholders  Evaluation of managers  Based on a % return relative to a benchmark/ budgeted % return  Often compensation-based  The higher the profit or ROI, the larger the bonus  Tools to evaluate  Profit  Return on investment (ROI)  Residual income (RI)  EVA/Residual income  Balanced scorecard

9. 9 The End