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Evaluation of Investment

Centers

Managerial Accounting

Prepared by Diane TannerUniversity of North Florida

Chapter 24

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Responsibility Accounting A concept that separates a company into responsibility

segments to enable a more efficient way to manage a large organization

A segment is a responsibility center within a company Can be any part or activity of an organization about

which upper level managers want to track costs, revenue, or profit data

Each segment manager is given responsibilities to control the segment

By geographical region

A Product lineA Store or Service Area

Forms of Segment Control

Decentralization The process of ‘pushing’ decision-making

down to those closer to the actual work as they are in the best position to do it

Centralization A few individuals at the top of an

organization retain decision-making authority

Delegation to lower-level managers gives little control to lower levels

Advantages of Decentralization

1. Better decisions can be made by those who do the work

2. Faster decisions can be made by those who do the work

3. Managers are motivated4. Great training to enable lower level managers to

move up the ladder more quickly

Disadvantages of Decentralization

1. Some work is duplicated creating additional costs

2. Lack of goal congruence I.e., the goals of the manager differ from the goals

of the company

Controlling under Decentralization

Performance evaluation is a key responsibility of managers at all levels

Top management must evaluate lower-level managers who have been given authority to make decisions

Benefits of performance evaluation• To control the work that is being performed• To influence a manager's behavior through

enhancement of employee motivation, commitment, and productivity

• To identify goals and objectives for the employee• To identify process improvement opportunities

Responsibility Centers

Cost Center A segment

whose manager has control over

only costs.Cost

Cost

Cost

Profit Center A segment whose

manager has control over both

costs and revenues.

RevenuesSales

CostsSalariesRent

Investment Center A segment whose manager has control

over costs, revenues, and investments in operating assets.

Each center has a different performance evaluation focus because respective managers are responsible for different business segments.

Revenue Center

A segment whose manager has control over

revenues.

Performance Evaluation of Investment Centers

Managerial goal To maximize return on investment for shareholders

Evaluation of managers Based on a % return relative to a benchmark/

budgeted % return Often compensation-based

The higher the profit or ROI, the larger the bonus Tools to evaluate

Profit Return on investment (ROI) Residual income (RI) EVA/Residual income Balanced scorecard

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The End