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CHAPTER ELEVEN
Decentralization, Evaluation, and the Balance Scorecard
In this chapter, we discuss cost control and performance evaluation in a
decentralized environment. We also discuss the impact of responsibility
accounting and segment reporting on decision making in decentralized
Key Concepts
• Decentralized organizations must have managers who are competent,
experienced, and have the authority required to make decisions.
• The key to effective decision making in a decentralized organization is
responsibility accounting – holding managers responsible for only those
things under their control.
• The balanced scorecard approach requires looking at performance from
four different but related perspectives: financial, customer, internal
business, and learning and growth.
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• The traditional view of quality costs is that total quality costs are minimized
at some acceptable level of defects, while the contemporary view is that
Learning Objectives
LO1— Describe the structure and management of decentralized organizations
and evaluate the benefits and drawbacks of decentralization
LO5— Compute, interpret and compare return on investment (ROI), and residual
income
LO6— Describe the balance scorecard
LO7— Define quality costs and explain the tradeoffs among prevention costs,
Lecture Outline
A. Introduction
o Managers should be held responsible for only those things
Chapter 11 – Decentralization, Evaluation, and the Balanced Scorecard
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B. Management of Decentralized Organizations (LO1)
o A decentralized organization is one in which decision-making
authority is spread throughout the organization.
1. Benefits of Decentralization
o Generally, those closest to a problem are most familiar with
the problem and its root causes.
2. Drawbacks of Decentralization
o A lack of company focus can occur.
Key Concept
Decentralized organizations must have managers who are competent,
experienced, and have the authority required to make decisions.
Instructor’s Manual
C. Responsibility Accounting and Segment Reporting (LO2)
o Responsibility accounting holds managers responsible for
D. Cost, Revenue, Profit, and Investment Centers (LO3)
o Organizations typically identify the different segments or
levels of responsibility as cost, revenue, profit or investment
centers.
1. Cost Centers
2. Revenue Centers
3. Profit Centers
4. Investment Centers
o An investment center manager is responsible for the amount
Key Concept
The key to effective decision making in a decentralized organization is
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E. Profit Center Performance and Segmented Income Statements (LO4)
o Segmented income statements calculate income for each
major segment of an organization in addition to the company
as a whole.
1. The Segmented Income Statement
o Segment margin is a measure of long-term profitability and is
more appropriate in addressing long-term decisions.
F. Investment Centers and Measures of Performance (LO5)
Key Concept
Key Concept
Instructor’s Manual
o Investment center managers are responsible for the amount
of capital invested in generating a segment’s income, along
1. Return on Investment (ROI)
o ROI measures the rate of return generated by an investment
center’s assets.
o ROI = Margin x Turnover
a. Margin and Turnover
o Margin = Net operating income ÷ Sales
2. Ways to Increase ROI (Example)
a. Increase Sales Volume or Sales Price
Key Concept
Evaluating the performance of investment center managers is complex
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3. Residual Income
o Residual income is an alternative to ROI.
o It is the amount of income earned in excess of some
predetermined minimum level of return on assets.
4. Decentralization and Performance Evaluation in a Multinational Company
o Segments or divisions in a multinational company are often
G. Performance Evaluation Using the Balanced Scorecard (LO6)
o Uses a set of financial and nonfinancial measures that relate
to the overall strategy of the organization.
Key Concept
The balanced scorecard approach integrates financial and
nonfinancial performance measures.
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1. Financial Perspective
2. Customer Perspective
o Critical success factors under this perspective are:
3. Internal Business Perspective
o Critical success factors would include:
c. Manufacturing cycle efficiency
a. Productivity
o Measure of the relationship between outputs and inputs.
b. Manufacturing cycle time and Throughput
o Manufacturing cycle time is the time required to produce a
c. Manufacturing Cycle Efficiency (MCE)
o MCE = Value-added time ÷ Manufacturing cycle time
4. Learning and Growth Perspective
o It links the critical success factors in the other perspectives
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H. The Costs of Quality (LO7)
o Quality costs are typically classified into four general
categories:
a. Prevention costs – costs incurred to prevent product
failure from occurring
1. Measuring and Controlling Quality Costs
o Quality means meeting or exceeding customers’
expectations.
2. Minimizing Quality Costs
MAKING IT REAL
External Failure Costs
Instructor’s Manual
o A traditional view of the costs of quality suggests that total
I. Performance and Management Compensation Decisions (LO8)
1. Cash Compensation
2. Stock-based Compensation
3. Noncash Benefits and Perks
o Includes club memberships and company cars, a corner
office, and others.
4. Measuring and Rewarding Performance in a Multinational Environment.
o Companies that do business in more than one country must
Key Concept
In order to motivate managers and ensure goal congruence, the
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End-of-Chapter Material
Problem 10 compares ROI and residual income using different asset measures.