Decentralization
What is one benefit of decentralization for top management?
It frees top management to focus on strategy
A manager who controls only costs is responsible for what type of center?
Cost Center
What is the formula for ROI?
Net Operating Income / Average Operating Assets
What is the formula for residual income?
Net Operating Income - (Minimum Required Return × Average Operating Assets)
What is one criticism of ROI as a performance measure?
Managers inherit costs they can’t control.
What is a disadvantage of decentralization related to coordination?
It may lead to a lack of coordination among autonomous managers.
A manager who controls both costs and revenues is responsible for what type of center?
Profit Center
What does ROI measure?
The return earned on the investment in average operating assets.
How does residual income differ from ROI?
Residual income measures absolute dollars above a required return, while ROI is a percentage.
Why is residual income considered a motivational tool?
It encourages managers to make profitable investments.
Which type of manager is closest to the customer and can respond quickly?
Lower-level managers in a decentralized organization.
What type of center allows control over costs, revenues, and investments?
Investment Center
If a company has $30,000 NOI and $200,000 average assets, what is ROI?
15%
If a division earns $30,000 on $100,000 assets with a 20% required return, what is residual income?
$10,000
What other system can complement ROI and RI for a balanced view?
The Balanced Scorecard
Why might a lower-level manager’s decision conflict with organizational goals?
Their objectives may not align with those of the organization.
What is a 'responsibility center' in managerial accounting?
A segment whose manager is accountable for costs, profits, or investments.
Why might managers reject profitable investments under ROI?
Because it could lower their ROI even if it benefits the company.
Why might residual income encourage better decisions than ROI?
Managers will accept any investment that earns more than the required return.
What is one reason performance evaluation systems are needed in decentralized organizations?
To align divisional goals with company goals.
What is one reason decentralization increases job satisfaction?
It provides decision-making authority and responsibility to lower-level managers.
What is the main purpose of a responsibility accounting system?
To hold managers accountable for items they can significantly control
What are two ways to increase ROI?
Increase sales or reduce expenses while maintaining the same asset base
If required return is 15% and residual income is positive, what does that mean?
The division earned more than the minimum required return.
How can ROI and residual income together improve decision-making?
ROI provides efficiency insight; RI encourages profitable investments.