Economic value added advantages and disadvantages ppt

Managerial Accounting

Discussion 6 Mounica Battula

578703

July 19th, 2020

1

Why DECENTRALIZATION?

Advantages and disadvantages

Cost centers

Profit centers

Investment centers

Numerical example

references

Top Level Management giving the general managerial employees the decision-making abilities thus making time and resources put into major decision and strategy planning by the top management.

2

Why decentralization?

Many organizations usually decentralize their operations to achieve excellent management of each organization segment.

In a decentralized organization, each segment manager is given the operational responsibilities and that of decision making.

Each type of organization can implement decentralization.

Organizations usually decentralize due to necessity as they expand.

When organizations expand, the responsibility of managers or one manager may become overwhelming.

3

Advantages of decentralization

Gives a sense of ownership to managerial employees

Managers have more experience and exposure towards the ground level happenings

Quick decision making

Cost savings

Lightens the burden on top level management

Better supervision of managers over team

Implicit training for future leaders / Shapes future leaders

Brings out the best among the team

Decentralization helps the top-level management to release reins over managing and let the managers do the decision making. This leads to saving time and resources of c-level management which is considered as money.

The managers usually have more exposure towards the team and have more information towards the issues related to the ground level. In case of crisis, quick decision making can save lot of time and money. Decentralization ensures this. (Keil & Anderson, 2018).

4

Disadvantages of decentralization

Can cause chaos if not implemented in proper and efficient way

Clear communication is necessary to keep the high-level management in loop

Certain decisions taken by mangers may cause conflict with vision and bigger plans of top management

Costs may increase as managers need additional information and resources for decision making

If in not trained or experienced personnel, decentralized teams often tend to underperform without supervision from headquarters

Training can be time consuming and highly expensive

Missing the bigger picture and vison of the organization by thinking in silos

One main disadvantage business intellectuals sees in Decentralization is losing control over the teams. This is a sensitive thing when it comes to decision making. Having experienced and well-versed managers may help but without that ideal case, the teams might start behaving autonomously and they might deviate from company’s goal and vision. This can cause damage to the progress of the organization.

Providing training can overcome the disadvantages but it can be time consuming and expensive. And clear communication channels is one powerful tool that ensures decentralization can be implemented. (Direction, 2018).

5

What are cost centers, profit centers and investment centers ?

6

Cost Centers

Produce goods

Provide Services to the organization

NO control over sales prices

Only focused on the total costs incurred

Quality of goods is highly dependent on the cost centers

Inferior materials vs Quality materials with respect to costs determine the quality

Cost Centers produce goods or provide services necessary for the company. Their primary objective is only to produce goods and services, they don’t hold the control over sales and prices. Hence, they can be evaluated based only on their total costs incurred. (Kaplan & Atkinson, 2015).

7

Profit Centers

Responsible for Costs , Revenues. Hence Profits(Revenues-Costs)

No control over investments in assets

Ex: Retail stores like NIKE, GAP

Some Profit centers may act as Investment center when the manger is involved in investment(expansion of business). It is determined case by case basis.

Methods used for performance evaluation vary.

Some compare actual profit to budgeted profit, some uses segmented income statement ratios

Profit Centers are part of the organizational structure of the business where they have the power to set the costs and revenues thereby can determine profits. Retail stores like GAP, NIKE or individual fast food restaurants like McDonalds, KFC are such examples for profit centers.

Several measures are used to measure the performance of Profit Centers. Return on Investment, Economic Value Added (EVA) are some of the mostly used measures. (Hilton & Platt, 2015).

8

Investment Centers

Responsible for costs, revenues and investments in assets

Control and supervise over business and asset investment decisions

Stand-alone businesses

Eg: Lincoln division for Ford motors.

Most used Measures to evaluate performance are ROI, RI and EVA.

Investment Center is part of the business responsible for costs, revenues and also investments in assets. Managers of investment centers monitor and have control over asset investment decisions. Hence investment centers are considered as stand-alone businesses.

There are several measures used to evaluate performance of investment centers such as Return On Investments(ROI), Economic Value Added(EVA) and such. (Danzinger & Reichmann, 2019).

9

Numerical Example

Let see an example for the performance measurement of organization:

Net operating income 45,00,000/-, sales 16,000,000/-, operating assets 34,000,000/- and calculate return on investment.

Return on investment = margin* turnover

Margin = net operating income / sales

= 45,00,000/ 16,000,000= 28%

Turnover = sales/ average operating assets

= 16,000,000/34,000,000 =0.47

Return on investment = 28* 0.47= 13%

Return on investment = 13%

Therefore the return on investment is equal to 13%, it indicates the performance of the organization and how much return they are earning.

With this example we calculate how much return will be earning by the company on their investment. The time utilization will be effective, and the sales will be improving, turnover will be maximized. The margin will be calculated through the net operating income by net sales then it will be shown in percentage.

It can help to improve the ability of the firm towards the efficiency and continuous standards for the business organization. The strength and weakness will be recognized through this performance measurement. Through this performance measurement the growth of the organization will be improved, and the new strategies will be designed for the business and applied for developing the business organization. It can help to improve the ability of the firm towards the efficiency and continuous standards for the business organization. (Muminov, Karimov, Melibayeva & Rakhmanov, 2020).

10

references

Danzinger, G., & Reichmann, K. (2019). How does the CSR engagement of CEO’s relate to TBL performance under the condition of a decentralized organizational structure?: An example of the largest German stock-listed corporations.

Direction, S. (2018). Centralizing or decentralizing control in crisis: The advantages and disadvantages.

Hilton, R. W., & Platt, D. E. (2015). Managerial accounting: creating value in a dynamic business environment. New York: McGraw-Hill/Irwin.

Huemann, M. (2016). Managing the project-oriented organization. In Gower handbook of project management (pp. 493-506). Routledge.

Kaplan, R. S., & Atkinson, A. A. (2015). Advanced management accounting. PHI Learning.

Keil, S., & Anderson, P. (2018). Decentralization as a tool for conflict resolution. In Handbook of Territorial Politics. Edward Elgar Publishing.

Muminov, N., Karimov, A., Melibayeva, G., & Rakhmanov, B. (2020). THEORETICAL PROBLEMS OF CENTRALIZATION AND DECENTRALIZATION OF LOCAL BUDGETS. International Journal of Psychosocial Rehabilitation, 24(04).

Danzinger, G., & Reichmann, K. (2019). How does the CSR engagement of CEO’s relate to TBL performance under the condition of a decentralized organizational structure?: An example of the largest German stock-listed corporations.

Direction, S. (2018). Centralizing or decentralizing control in crisis: The advantages and disadvantages.

Hilton, R. W., & Platt, D. E. (2015). Managerial accounting: creating value in a dynamic business environment. New York: McGraw-Hill/Irwin.

Huemann, M. (2016). Managing the project-oriented organization. In Gower handbook of project management (pp. 493-506). Routledge.

Kaplan, R. S., & Atkinson, A. A. (2015). Advanced management accounting. PHI Learning.

Keil, S., & Anderson, P. (2018). Decentralization as a tool for conflict resolution. In Handbook of Territorial Politics. Edward Elgar Publishing.

Muminov, N., Karimov, A., Melibayeva, G., & Rakhmanov, B. (2020). THEORETICAL PROBLEMS OF CENTRALIZATION AND DECENTRALIZATION OF LOCAL BUDGETS. International Journal of Psychosocial Rehabilitation, 24(04).