The Work of Management

Planning

Evaluating

Decision Making

Organizing & Directing

Controlling

Controlling Operations
Management by exception Responsibility Accounting Delegation of authority Management by walking around

Responsibility Accounting
. . . is a reporting system in which a cost is charged to the lowest level of management that has responsibility for it.
President and CEO Vice President Marketing Vice President Production Vice President Controller

Installing Responsibility Accounting

Create a set of financial performance goals (budgets). Measure and report actual performance. Evaluate based on comparison of actual with budget.

Responsibility Accounting
Evaluation of responsibility centers depends on . . .
The extent of delegation of authority; and A manager s preference

Decentralization . . .
. . . the delegation of authority to the lowest level of management responsibility that can make decisions.

Centralization . . .
. . . A centralized organization is one in which little authority is delegated to lower level managers.

Decentralization
The more decentralized the firm, the greater the need for control.
Monitor employees Motivate employees

Advantages of Decentralization
Top level managers are relieved of making routine decisions. Higher employee morale Training Decisions are made where the action is taking place.

Disadvantages of Decentralization
Upper level management loses some control. Lack of goal congruence. Duplication of effort.

Decentralization and Segment Reporting

An Individual Store
Quick Mart

A segment is any part or activity of an organization about which a manager seeks cost, revenue, or profit data. A segment can be

A Sales Territory

A Service Center

Cost, Profit, and Investments Centers

Responsibility Centers

Cost Center

Profit Center

Investment Center

Responsibility Centers: A Systems Perspective

Data (Inputs)

Processing Steps Within Information Systems Capital . . . Working Capital Equipment Etc.

Information (Outputs)

Resources used . . . DM DL MOH

Output . . . Goods, Services, Ideas

Cost, Profit, and Investments Centers

Cost Center A segment whose manager has control over costs, but not over revenues or investment funds.

Responsibility Centers: A Systems Perspective

Input

Process

Output

Cost Center
Control only this

Evaluation . . .
A cost center is evaluated by means of performance reports (i.e., comparison of actual with standard).

Segments Classified as Cost, Profit and Investment Centers

Responsibility Centers: A Systems Perspective

Input

Process

Output

Profit Center
Control these

Cost, Profit, and Investments Centers

Profit Center A segment whose manager has control over both costs and revenues, but no control over investment funds.
Revenues
Sales Interest Other

Costs
Mfg. costs Commissions Salaries Other

A Profit Center . . .
A profit center is evaluated by means of contribution margin income statements.

Segments Classified as Cost, Profit and Investment Centers

Cost, Profit, and Investments Centers

Investment Center A segment whose manager has control over costs, revenues, and investments in operating assets.

Corporate Headquarters

Responsibility Centers: A Systems Perspective

Input

Process

Output

Investment Center
Control these

Investment Center
An investment center is evaluated by means of the Return on Investment (ROI) or the Residual Income (RI) it is able to generate.

Segments Classified as Cost, Profit and Investment Centers

Responsibility Centers

Profit Center Vs. Investment Center

A profit center is focused on profits as measured by the difference between revenues and expenses. An investment center is compared with the assets employed in earning revenues.

Return on Investment
The ROI formula is expressed as:

Return on Investment
Where . . .

Income Margin = -------------------Sales

Return on Investment
Where . . .

Sales Turnover = -----------------------------Invested Capital

Return on Investment
Income
------------------------------

Sales
------------------------------

Sales The ratio of operating income to sales

Invested Capital

The efficiency of asset utilization.

Return on Investment

Income -----------------------------Sales

Sales -----------------------------Invested Capital

The ratio of operating income to sales

The efficiency of asset utilization.

Return on Investment

Income -----------------------------Invested Capital

ROI

Cost of Goods Sold Selling Expense Admin. Expense

Sales

Sales - OE
Operating Expenses

Net Oper. Income

NOI / Sales
Sales

Margin

Margin is a measure of managements ability to control operating expenses in relation to sales.

Turnover is a measure of the amount of sales that can be generated in an investment center for each dollar invested in operating assets.
Cash Accounts Receivable Inventory Current Assets Sales

Sales / AOA
Ave Oper Assets

Turnover

CA + NCA
PP&E Other Assets Noncurr. Assets

Cost of Goods Sold Selling Expense Admin. Expense

Sales

Sales - OE
Operating Expenses

Net Oper. Income

NOI / Sales
Sales

Margin

MxT
Cash Accounts Receivable Inventory Current Assets Sales

ROI

Sales / AOA
Ave Oper Assets

Turnover

CA + NCA
PP&E Other Assets Noncurr. Assets

Return on Investment (ROI) Formula

Income before interest and taxes (EBIT)

Net operating income ROI = Average operating assets

Cash, accounts receivable, inventory, plant and equipment, and other productive assets.

Improving the ROI

Increase Sales Reduce Expenses Reduce Assets

XYZ Company

Income (EBIT)

$30,000

Sales

$500,000

Invested Capital

$200,000

Return on Investment
$30,000 -------------$500,000 6% $500,000 -------------$200,000 2.5

x x
15%

Advantages of ROI . . .
It encourages managers to focus on the relationship among sales, expenses, and investment. It encourages managers to focus on cost efficiency. It encourages managers to focus on operating asset efficiency.