ppt ch12 management accounting 5e

7/24/2019 PPT Ch12 Management Accounting 5e

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'utline

• Decentralisation and responsibility accounting• Responsibility centres

• New developments in organisational structuring

– Team-based structures and shared services

• Financial performance reports• Transfer pricing

12-2

Copyright 2009 McGraw-Hill Australia ty !td

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(ecentralisation and

responsi%ility accounting• Decentralisation – The restructuring of the organisation into units, such as units and departments,

each with specific operations and decision-maing responsibilities

• Responsibility accounting

– !ssigning responsibility to managers to run particular units of the organisation

– "elps to reinforce the advantages of decentralisation

• #oal congruence helps ensure that decentralised organisations are

effective

– $onsistency between managers% personal goals and the goals of the

organisation

12-)





(ecentralisation

• &enefits

– 'anagers of units have better local information about marets

and operations to enable them to manage their areas more

effectively

– (rovides managerial training for future higher-level managers

– 'ay lead to greater motivation and )ob satisfaction for unit

managers – !llows corporate managers more time for strategic issues

– Delegation allows the organisation to react more *uicly to

opportunities and problems as they arise

12-*

(cont.)





(ecentralisation +cont,

• Negative conse*uences

– 'anagers may focus too narrowly on their own unit%s performance

rather than on attaining the organisation%s overall goals

– +ome tass and services may be duplicated unnecessarily

• #oal congruence a behavioural challenge

– #oal congruence may be difficult to achieve in a decentralised

organisation

– (erformance measures and reward systems may provide

direction and incentives to achieve wider organisational goals

12-$





.esponsi%ility centres

• ! responsibility centres is a unit of an organisationwhere the manager is held accountable for the

unit%s activities and performance

– nvestment centre

– (rofit centre

– $ost centre

– Revenue centre

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(cont.)



12-





.esponsi%ility centres +cont,

• Terminology used in practice – $ost centre is commonly used

– Revenue centre seldom used

– (rofit centre may refer to both profit centres and

investment centres

– +trategic business unit .+&/0 often used to refer to

investment centres and occasionally to profit centres

which have their own distinct marets and strategies

12-





ew de3elopments in

organisational structuring• +hared services

– The concentration of some support services that are typically spread

across a decentralised organisation into a separate unit to service

multiple internal customers

– 'ay focus on non-strategic areas, such as accounts payable,

payroll, finance, information technology – $apture the best aspects of centralised and decentralised structures

– &usiness units may choose to use a shared service unit or an

outside provider, so there is an incentive for shared service units to

deliver high *uality service to internal customers

12-9



(cont.)



ew de3elopments in

organisational structuring +cont,• Team-based structures

– Firms have moved away from hierarchical structures

towards flatter structures that involve fewer levels of

management

– +elf-managed wor teams may be used to manage allaspects of a process

– n the production area, team responsibilities may include

(roduction planning, ordering materials, liaising with

suppliers and customers, all aspects of the production

process, cost budgets and performance management

12-10



(cont.)



ew de3elopments in

organisational structuring +cont,• Team-based structures

– Teams may manage some processes more effectively

– Teams may promote employee satisfaction, improved

customer satisfaction and productivity

#reater empowerment may result from the transfer ofdecision-maing responsibility from middle managers to

teams

– Teams are often set up as cost centres

Non-financial measures may be more important in

managing a team than cost measures

12-11





Financial performance reports

• ! financial performance report shows ey financial

results appropriate for the types of responsibility centre

• +egmented profit statements may show profits for

ma)or responsibility centres and the entire organisation

• ! contribution margin format may be used in these

reports to provide more useful information formanagers

12-12



(cont.)




+cont,• (erformance of units and unit managers may differ

– ! manager%s performance may be based on revenues and

costs that the manager can control or significantly influence

– Reports that evaluate the economic performance of a unit

should focus on revenues and costs that are attributable tothat unit

– n practice, not everyone agrees this distinction is warranted

12-1)



(cont.)




+cont,• $ost allocation in performance reports

– +ome costs attributable to a unit may be incurred outside

of that unit and therefore need to be allocated to the unit

$ausal allocation bases may be used to charge the costs of

services to the units that used the services

– $ommon costs result from activities that are performed for

the benefit of more than one responsibility centre

!rbitrary allocation of common cost to units may not provide

useful information in reports

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(cont.)




+cont,• ! hierarchy of financial performance reports may

be prepared

– To reflect the organisational structure

• &udgets and variance reports may be included inperformance reports

• !llocated costs should be included in performance

reports when relevant

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(cont.)




+cont,• Real-time reporting

– nvolves managers having access to up-to-date information whenever they

re*uire it

– #aining a competitive advantage may rely on having latest information on

company performance readily available

– The difficulties in achieving a virtual close may prevent real-time reporting – ! virtual close can be achieved by reducing the comple1ity of end-of-period

closing of accounts

Focus on critical performance data

mplement 2R( systems

Re-engineer the reporting system

12-1/






4ransfer pricing

• The internal selling price used when goods and services are

transferred between profit centres and investment centres in adecentralised organisation

– Revenue for the selling unit and cost for the buying unit

• !llows the selling unit to earn profit to reflect their effort in producing

the product

• The transfer price should

– Result in unit profits that are a reliable and accurate measure of unit

performance

– (reserve and encourage unit autonomy

– 2ncourage goal-congruent behaviour

12-1




(cont.)



4ransfer pricing +cont,

• 3ho sets the transfer prices4

– 'anagers of profit centres and investment centres may haveconsiderable autonomy in deciding whether

to accept or re)ect orders for goods or services

to source their materials inside or outside the organisation

to set and accept transfer prices

– Direct intervention by corporate .head office0 managers to dictate

transfer prices may be inconsistent with the philosophy of

decentralisation

– $orporate management may develop general policies for transfer

pricing

12-1




(cont.)




• Transfer pricing methods

– 'aret-based prices

– $ost-plus prices

– Negotiated prices

• 'aret-based prices

– Need competitive e1ternal marets for a product

• $ost-plus prices – 3here there is no e1ternal maret price

– ntermediate products have no maret outside the company, and are

processed further to become final products

12-19




(cont.)




• $ost-plus prices

– +tandard variable cost plus marup allows supplying unit

to show a contribution margin on the transferred product

– +tandard absorption cost may lead to overpricing of

products and dysfunctional decisions

– +tandard costs should always be used in favour ofactual costs, to prevent cost inefficiencies being passed

onto buying unit

12-20




(cont.)




• Negotiated prices – 'aret price may form the starting point, and cost may

be the lower boundary

• 3hether or not the supplying unit has spare

.e1cess0 capacity can influence the appropriate

level of transfer price

12-21




(cont.)




• #eneral transfer pricing rule – (rovides guidance on the appropriate transfer price

– Represents a minimum transfer price

– 'ay guide unit managers to mae goal-congruent

decisions

12-22

unitsupplyingtheto

unit percostopportunity

unitsupplying byincurred

unit percostsoutlayadditional priceTransfer +=






4ransfer pricing under different

scenarios56 !n e1ternal maret and spare capacity in the

supplying unit

– 3here there is spare capacity, a transfer of product

gives the supplying unit additional profits that it would

not otherwise mae

– The two units may negotiate a transfer price less than

maret to provide an incentive for the buying unit to

purchase from the supplying unit

12-2)




(cont.)




scenarios +cont,76 !n e1ternal maret and no spare capacity in the

supplying unit

– 3hen there is no spare capacity, the supplying unit will

need to account for the opportunity cost of lost profits on

sales due to the transfer

86 21ternal maret and limited capacity in the

supplying unit

– 3here capacity is limited, an opportunity cost needs to be

accounted for in the transfer price

12-2*




(cont.)




scenarios +cont,96 No e1ternal maret and spare capacity in the

supplying unit

– There is no opportunity cost associated with the transfer,

so the transfer price may be based on cost-plus

:6 No e1ternal maret and no spare capacity in the

supplying unit

– The transfer price will need to account for opportunity

cost on lost sales due to the transfer

12-2$






12-2/






4ransfer pricing and ser3ice le3el

agreements• ! service level agreement .+;!0 is a contract

between two units which

– establishes the nature of the service that will be provided

by one unit to the other

– outlines the responsibilities of each party – outlines price, *uality and timing of service delivery,

performance targets, problem-solving arrangements,

ways in which the agreement can be changed or

terminated

• The price of the service is a transfer price, andcan be determined using similar methods to

those used for the transfer of goods

12-2






"ummary

• Decentralisation is common in many organisations and

coupled with responsibility accounting may improve access tobetter information and sills, more timely decisions, increase

motivation of unit managers, and increase goal congruence

• Financial performance report can be structured along

responsibility lines and should reflect the type of

accountability assigned to units and their managers• The performance of units should be distinguished from the

performance of unit managers

12-29




(cont.)



"ummary +cont,

• Transfer pricing is used in decentralised organisations to

recognise revenue and costs of goods and services transferredbetween units

• Transfer prices may be based on maret prices, costs or may be

negotiated

• n a decentralised organisation, it is inconsistent for corporate

management to dictate transfer prices, but they may set broadpolicies

• ! general transfer pricing rule can provide a minimum transfer

price that may reduce dysfunctional decisions

12-)0




ppt ch12 management accounting 5e

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