Management Accounting Chapter 10 Decentralization Essay

3618 words - 15 pages

Chapter 10
Decentralization

Solutions to Questions

10-1 In a decentralized organization, decision-making isn’t confined to a few top executives, but rather is spread throughout the organization with managers at various levels making key decisions relating to their own spheres of responsibilities.

10-2 The benefits of decentralization include: (1) relieving top management from day-to-day problem solving and allowing them to focus their time on broader issues; (2) training lower-level managers in decision making, thereby preparing them to assume greater responsibility; (3) greater job satisfaction and greater incentive for lower-level managers; (4) better decisions, since ...view middle of the document...

This can happen any time an investment center’s ROI exceeds the minimum required rate of return for the company. The residual income approach overcomes this problem since any project whose rate of return exceeds the company’s minimum required rate of return will generate an increase in the investment center’s residual income.

10-9 A transfer price is the price charged for a transfer of goods or services between units of the same organization, such as two departments or divisions. Transfer prices are needed for performance evaluation.

Brief Exercise 10-1 (10 minutes)

|1. |[pic] |

|2. |[pic] |

|3. |[pic] |

Brief Exercise 10-2 (20 minutes)

|1. |[pic] |

|2. |[pic] |
Brief Exercise 10-2 (continued)

|3. |[pic] |
Brief Exercise 10-3 (10 minutes)

|Average operating assets (a) |£2,200,000 |
|Net operating income |£  400,000 |
|Minimum required return: 16% × (a) |    352,000 |
|Residual income |£    48,000 |
Exercise 10-4 (20 minutes)

1. ROI computations:

[pic]

Eastern Division: [pic]

Western Division: [pic]

2. The manager of the Western Division seems to be doing the better job. Although her margin is three percentage points lower than the margin of the Eastern Division, her turnover is higher (a turnover of 3.5, as compared to a turnover of two for the Eastern Division). The greater turnover more than offsets the lower margin, resulting in a 21% ROI, as compared to an 18% ROI for the other division.

Notice that if you look at margin alone, then the Eastern Division appears to be the strongest division. This fact underscores the importance of looking at turnover as well as at margin in evaluating performance in an investment center.
Exercise 10-5 (30 minutes)

1. ROI computations:

[pic]

Perth: [pic]

Darwin: [pic]

| 2. | |Perth...

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