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Chapter 9: Responsibility Accounting and Decentralization

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Chapter 9: Responsibility Accounting and Decentralization

23 problems · 0 figures

Multiple Choice 9.1 §9.1 source ↗

Which of the following is not a common goal of an organization?
  1. a.
    operational efficiency
  2. b.
    being acquired by another business
  3. c.
    achieving strategic goals
  4. d.
    measuring financial performance

Answer

B. being acquired by another business

Multiple Choice 9.3 §9.1 source ↗

In centralized organizations, primary decisions are made by ________.
  1. a.
    an individual at the top of the organization
  2. b.
    various managers throughout the organization
  3. c.
    outside consultants
  4. d.
    low-level management

Answer

A. an individual at the top of the organization

Multiple Choice 9.5 §9.1 source ↗

Strategic decisions occur ________.
  1. a.
    frequently and involve immediate decisions
  2. b.
    frequently and involve long-term decisions
  3. c.
    infrequently and involve long-term decisions
  4. d.
    infrequently and involve immediate decisions

Answer

C. infrequently and involve long-term decisions

Multiple Choice 9.7 §9.2 source ↗

Organizational charts ________.
  1. a.
    list the salaries of all employees
  2. b.
    outline the strategic goals of the organization
  3. c.
    show the structure of an organization
  4. d.
    help management measure financial performance

Answer

C. show the structure of an organization

Multiple Choice 9.9 §9.2 source ↗

Managers in decentralized organizations make decisions relating to all of the following except ________.
  1. a.
    the company’s stock price
  2. b.
    equipment purchases
  3. c.
    personnel
  4. d.
    prices to charge customers

Answer

A. the company’s stock price

Multiple Choice 9.11 §9.3 source ↗

A system that establishes financial accountability for operating segments within an organization is called ________.
  1. a.
    a financial statement
  2. b.
    an internal control system
  3. c.
    responsibility accounting
  4. d.
    centralization

Answer

C. responsibility accounting

Multiple Choice 9.13 §9.3 source ↗

A responsibility center structure that considers investments made by the operating segments by using a common cost of capital percentage is called ________.
  1. a.
    return on investment
  2. b.
    residual income
  3. c.
    a profit center
  4. d.
    a discretionary cost center

Answer

B. residual income

Multiple Choice 9.15 §9.4 source ↗

Costs that a company or manager can influence are called ________.
  1. a.
    discretionary costs
  2. b.
    fixed costs
  3. c.
    variable costs
  4. d.
    controllable costs

Answer

D. controllable costs

Multiple Choice 9.17 §9.4 source ↗

Internal costs that are charged to the segments of a business are called ________.
  1. a.
    controllable costs
  2. b.
    variable costs
  3. c.
    fixed costs
  4. d.
    allocated costs

Answer

D. allocated costs

Multiple Choice 9.19 §9.4 source ↗

A transfer pricing structure that considers the opportunity costs of selling to internal rather than external customers uses ________.
  1. a.
    the cost approach
  2. b.
    the general transfer pricing approach
  3. c.
    the market-based approach
  4. d.
    the opportunity cost approach

Answer

B. the general transfer pricing approach

Question 9.1 §9.1 source ↗

What is a management control system? What are its components and how does the system help the business?

Answer

A management control system allows management to establish, implement, and monitor the organization’s achievement of strategic goals. Once the goals are developed, goals must be communicated throughout the organization and activities of the organization should align to achieve the strategic goals. The control system must also provide feedback and allow for alterations, as necessary, to the organization’s strategic goals.

Question 9.3 §9.1 source ↗

Discuss the difference between centralized and decentralized organizations. Does the size of the organization influence whether the organization has a centralized or decentralized structure? Explain.

Answer

Centralized organizations reserve decision-making authority for top management. Decentralized organizations disperse decision-making throughout the organization. Companies of all sizes may exhibit tendencies for both centralized and decentralized decision-making. For example, while Apple might give its stores great latitude to meet customer needs, the company will reserve research and development activities for the highest levels of the organization.

Question 9.5 §9.1 source ↗

Discuss the difference between daily and strategic decisions. Think of a business and provide an example of a daily and strategic decision.

Answer

Daily decisions are frequent and usually have a short-term impact. Strategic decisions are infrequent and usually have a long-term impact. Daily decisions impact the operational effectiveness and efficiency of the organization while strategic decisions address the long-term aspect of the business. For example, daily decisions for a grocery store might relate to signage, displays, and inventory levels to maintain. Strategic decisions for a grocery store might include whether or not to offer online ordering or leasing in-store space to other businesses such as a coffee shop, nail salon, or bank.

Question 9.7 §9.1 source ↗

Another search of PepsiCo’s 2017 annual report reveals the company maintains a centralized management perspective on aspects of these items:

• Commodities (items such as sugar and high fructose corn syrup that go into many of the beverages)

• Research and development

• Insurance and benefit program

• Foreign currency transactions

• Debt, investments, and other financing activities

Explain why these activities would be centralized functions within PepsiCo as opposed to decentralized like many other activities.

Answer

These activities represent a significant cost to the organization, require specialization, relate to strategic and quality goals, and allow for benefits related to buying power. Also, there is the possibility that without centralizing some of these costs, they might experience a significant cost overrun. For example, the company might want to finance capital improvements, and they often can do so less expensively, in terms of interest rates, by packaging bonds into one issue. Similar cost savings and improvements in operational efficiencies could probably be identified in the other examples listed.

Question 9.9 §9.2 source ↗

Choose a company and describe how a specific issue, policy, or procedure (for example, granting merchandise returns, establishing sales prices) might look if the business is structured as a centralized business.

Answer

Answers will vary. Sample answer: McDonald’s might have a policy that all stores must sell items at a price set by the company. The purpose of this is to prevent stores from competing with each other based on price and causing confusion or frustration with customers.

Question 9.11 §9.2 source ↗

Assume you are the manager of a local Starbucks. What factors do you feel would be relevant to hiring workers (including pay), assuming Starbucks is a decentralized organization?

Answer

Answers will vary. Responses should include factors relating to establishing a competitive pay rate based on the local economy, hiring experienced workers, investing in training, and other factors necessary to ensure the store’s success.

Question 9.13 §9.2 source ↗

Use Netflix’s 2017 annual report to answer the following questions. How many segments does Netflix have? What are the segments? The annual report also shows selected nonfinancial and financial information for each segment. Prepare a brief presentation listing the “Paid memberships at end of period,” “Revenues,” and “Contribution profit” (also called operating profit) for the three most recent years (2017, 2016, and 2015). In the presentation, include any observations you notice about the trends of each segment.

Answer

Netflix has three segments: Domestic Streaming, International Streaming, and Domestic DVD. Responses should present the following information:

Domestic Streaming 2017       2016       2015      
Paid memberships 54,750 47,905 43,401
Revenues $6,153,025 $5,077,307 $4,180,339
Contribution profit/(loss) $2,280,454 $1,838,686 $1,375,500
International Streaming 2017       2016       2015      
Paid memberships 62,832 41,185 27,438
Revenues $5,089,191 $3,211,095 $1,953,435
Contribution profit/(loss) $226,589 ($308,521) ($333,386)
Domestic DVD 2017       2016       2015      
Paid memberships 3,380 4,029 4,787
Revenues $450,497 $542,267 $645,737
Contribution profit/(loss) $249,972 $279,525 $321,829

Responses may note that Domestic Streaming memberships, revenues, and contribution profit are all increasing. International streaming is experiencing significant increases in memberships and revenues, but the contribution loss continues (the loss decreased from 2016 to 2017). The Domestic DVD segment is experiencing declining memberships, revenues, and contribution profit.

Question 9.15 §9.2 source ↗

Lavell started out mowing lawns in the neighborhood when he was 13 years old. He did such good work that, without advertising, his business grew steadily each year. After college, Lavell decided to continue the business as a full-time career. One of his concerns, however, is the number of hours he is putting in. Once school lets out, he finds himself working long hours nearly every day of the week. Although he has added workers, his business now handles mowing, trimming, and landscaping for residential, corporate, and nonprofit clients. He is considering adding managers but is not quite sure how to structure the organization. Lavell wants to focus on building the business rather than doing the daily work, so he knows a decentralized structure will be best. He has asked you to develop a potential organizational chart to help him envision the best way to organize the business. Describe the advantages to this approach as well as any concerns he should have.

Answer

Answers will vary. Responses should include an organizational chart for a decentralized structure that includes three divisions: residential, corporate, and nonprofit. Under each of these divisions would be the mowing, trimming, and landscaping activities. Alternative responses may present three divisions: mowing, trimming, and landscaping activities with the client categories (residential, corporate, and nonprofit) below each. This is less desirable due to inefficiency. The advantage of this approach is the speed of decision-making and responding to clients. Lavell would need to ensure the quality of the services remains at a high standard.

Question 9.17 §9.3 source ↗

Describe the concept of a cost center and, using a specific organization, give an example of how this might be used to achieve the strategic goals of the organization.

Answer

Answers will vary. One example is the transportation division in a school system. The goal of the transportation division is to manage costs while maintaining safety in transporting students.

Question 9.19 §9.3 source ↗

Explain the benefits of a return on investment structure within an investment center framework. It may help to think of an example using an existing company.

Answer

Answers will vary. The benefits of an ROI structure include consideration for the segment’s investment and evaluation of management’s ability to generate profitability. In addition, this framework incentivizes management to undertake value-added investments. A disadvantage is that the segment may prioritize the segment over company financial goals.

Question 9.21 §9.4 source ↗

Discuss the concept of controllable and uncontrollable costs and how they affect the evaluation of the responsibility center’s financial performance.

Answer

Answers will vary. Managers can influence controllable costs but have little or no ability to influence uncontrollable costs. While it is common to include uncontrollable (including allocated) costs in the financial information of the responsibility center, managers should be evaluated only on controllable costs.

Question 9.23 §9.4 source ↗

Discuss the advantages and disadvantages of a market-based transfer pricing approach.

Answer

Answers will vary. An advantage of a market-based approach is that the company remains up-to-date on current cost levels. This allows the business to compare its current cost structure to the market and to identify areas where changes are necessary. A disadvantage is this approach is that it requires a significant investment of time and resources on the part of the business.

Question 9.25 §9.4 source ↗

Discuss the advantages and disadvantages of a negotiated transfer pricing approach.

Answer

Answers will vary. An advantage of a negotiated approach is that the responsibility center management must be actively involved in the process of establishing the transfer price. This approach may encourage managers to remain attentive to opportunities for cost improvements. A disadvantage would include the possibility of significant disagreements between responsibility center managers.

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Problems and answers are adapted from Principles of Accounting, Volume 2: Managerial Accounting by Mitchell Franklin, Patty Graybeal and Dixon Cooper, OpenStax, and are used under the CC BY-NC-SA 4.0 licence. Access for free at https://openstax.org/books/principles-managerial-accounting/pages/1-why-it-matters. Illustrations: Copyright Rice University, OpenStax, under CC BY-NC-SA 4.0 license. This adaptation is released under the same licence, is non-commercial, and is neither affiliated with nor endorsed by OpenStax or Rice University.