Kế toán, kiểm toán - Chapter 11: Performance measurement in decentralized organizations

Performance Measurement in Decentralized OrganizationsChapter 11McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.Decentralization in OrganizationsBenefits ofDecentralizationTop managementfreed to concentrateon strategy.Lower-level decisionsoften based onbetter information.Lower level managers can respond quickly to customers.Lower-level managersgain experience indecision-making.Decision-makingauthority leads tojob satisfaction.Decentralization in OrganizationsDisadvantages ofDecentralizationLower-level managersmay make decisionswithout seeing the“big picture.”May be a lack ofcoordination amongautonomousmanagers.Lower-level manager’sobjectives may notbe those of theorganization.May be difficult tospread innovative ideasin the organization.Cost, Profit, and Investments CentersResponsibilityCenterCostCenterProfitCenterInvestmentCenterCost, profit,and investmentcenters are allknown asresponsibilitycenters.Return on Investment (ROI) FormulaROI = Net operating incomeAverage operating assets Cash, accounts receivable, inventory,plant and equipment, and otherproductive assets.Income before interestand taxes (EBIT)Understanding ROIROI = Net operating incomeAverage operating assets Margin = Net operating incomeSales Turnover = SalesAverage operating assets ROI = Margin  TurnoverCriticisms of ROIIn the absence of the balancedscorecard, management maynot know how to increase ROI.Managers often inherit manycommitted costs over whichthey have no control.Managers evaluated on ROImay reject profitableinvestment opportunities. Calculating Residual Income()This computation differs from ROI. ROI measures net operating income earned relative to the investment in average operating assets. Residual income measures net operating income earned less the minimum required return on average operating assets.Motivation and Residual IncomeResidual income encourages managers to make profitable investments that wouldbe rejected by managers using ROI.Divisional Comparisons and Residual IncomeThe residual income approach has one major disadvantage. It cannot be used to compare the performance of divisions of different sizes.ManufacturingCycleEfficiency Value-added timeManufacturing cycle time=Wait TimeProcess Time + Inspection Time+ Move Time + Queue TimeDelivery Cycle Time Order ReceivedProductionStartedGoods ShippedThroughput TimeDelivery Performance MeasuresThe Balanced ScorecardManagement translates its strategy into performance measures that employees understand and influence.CustomerLearningand growthInternalbusinessprocessesFinancialPerformancemeasuresThe Balanced Scorecard: FromStrategy to Performance MeasuresFinancialHas our financialperformance improved?CustomerDo customers recognize thatwe are delivering more value?Internal Business ProcessesHave we improved key business processes so that we can deliver more value to customers?Learning and GrowthAre we maintaining our abilityto change and improve?Performance MeasuresWhat are ourfinancial goals?What customers dowe want to serve andhow are we going towin and retain them?What internal busi-ness processes arecritical to providingvalue to customers?Vision and StrategyThe Balanced Scorecard: Non-financial MeasuresThe balanced scorecard relies on non-financial measures in addition to financial measures for two reasons: Financial measures are lag indicators that summarize the results of past actions. Non-financial measures are leading indicators of future financial performance. Top managers are ordinarily responsible for financial performance measures – not lower level managers.  Non-financial measures are more likely to be understood and controlled by lower level managers.End of Chapter 11