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41 Cards in this Set

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  • Back
What is the primary distinction between centralized and decentralized organizations?
The degree of freedom of decision making by the managers at many levels.
Centralized organization decision making
consolidated so that decision making happens at the top
Decentralized organization
Decision making is at a low a level as possible. The premise is that the local manager can make more informed decisions than a manager farther from the decision.
What is another name for a responsibility center
Strategic business units
What are the 4 responsibility centers?
1. cost center
2. revenue center
3. profit center
4. investment center
Cost Center
Responsible for costs only
Definition of a responsibility center
Sub units where managers are responsible for specific financial results.
Revenue Center
Sales Department, Responsible for revenues only
Profit Center
Department in a retail store, Responsible for both revenues and expenses
Investment center
Branch office, responsible for revenues expenses, and invested capital.
Controllable factors
factors that a manager can influence in a given time period.
Goal Congruence
Performance measures must be designed such that the manager's pursuit of them ties directly to accomplishment of the organizations overall goals.
What is the most appropriate performance measurement technique for managers of cost and revenue centers?
Variance Analysis
How should performance measures be based for Cost and Revenue Centers?
Based on a cause and effect relationship.
How should performance measures be based for Profit Centers?
The Contribution margin approach.
What is the purpose of performance measures for investment centers?
They reveal how efficiently the manager is deploying capital to produce income for the organization.
How should performance measures be based for investment centers?
It should relate the centers resources (Balance sheet) to its income (income statement)
what is the most widely used performance measurement for an investment center
Return on investment
Residual income
Business unit profit -Average total assets x Target rate of Return)
Why is Residual income often considered preferable to ROI?
It deals in absolute dollars rather than percentages.
A company that uses LIFO will often show ________ inventory and __________ costs than a company that uses the FIFO methodology.
lower inventories , higher costs.
A company that uses FIFO will often show ________ inventory and __________ costs than a company that uses the LIFO methodology.
Higher Inventories, Lower costs
A division that shares its assets with another division may find that it has a _________ rate of return than the division that has access to the use of the assets.
What is the advantage in using straight line depreciation on plant assets?
lower expenses.
What is the advantage in using accelerated depreciation on plant assets?
tax savings
Common costs
costs of products, activities, facilities, services or operations shared by two or more cost objects.
Reasons for Headquarter support costs
1. Reminds managers that they exist.
2. remind managers that profit center earnings must cover some amount of support costs.
3. Departments or divisions should be motivated to use central support services appropriately
4. Managers who must bear the costs of central support services that they do not control exert pressure on those who do.
Transfer prices
Amounts charged by one segment of an organization for the goods and services it provides to another segment of the same organization.
What is the principle challenge in transfer pricing
determining a price that motivates both the selling and buying manager to pursue organizational goal congruence.
what are the four basic methods of transfer price setting?
Variable cost, full cost, market price, negotiated price.
When should the Variable cost transfer price scheme be used?
only when the selling division has excess capacity. However there is little motivation because they will be producing at a loss (not covering fixed costs)(
What does parker do for transfer pricing?
Cost + 15% aka Variable costing
What is the advantage in using variable costs?
The BUYER is motivated to solve the COMPANYs excess capacity problem, even though that excess capacity is not at the buyers division.
Full Cost
cost includes materials, labor, and full allocation of manufacturing overhead.

Selling division will not incur a loss . Buyer gets it at less than market price.
when organizational subunits are free to determine the prices at which they buy and sell internally. A transfer price may simply reflect the best bargain that the parties can strike.
Dual Pricing
The selling and buying units record the transfer at different prices. In Effect, the seller is given a corporate subsidy.
Critical Success Factors
specific, measurable financial and non financial elements of a firms performance that are vital to its competitive advantage
Balanced Scorecard
Goal congruence tool that informs managers about the nonfinancial factors that top management believes to be important.
Measures on the balanced scorecard
Financial/NonFinancial, Internal/External, short/long term.
SWOT Analysis
address internal strenghts and weaknesses,
Opportunities and threats.
What are the problems in implementing a balanced scorecard?
Using too many measures
Failing to evaluate personnel on both financial and non financial measures
Including measures that will not have long term financial benefits
Not understanding subjective measures are imprecise
Trying to achieve improvements in all areas at all times
NOt being aware that the hypothesized connection between nonfinancial measures and ultimate financial success may not continue to be true.