Centralized Organization:
Top management makes all significant decisions

Decentralized Organization:
Managers at various levels make significant decisions

The structure typically evolves from highly centralized to highly decentralized as the company grows.

Effective decentralization requires “Responsibility Reporting”

Reports for individual subunits of the business that help upper level management evaluate performance of organizational units.

Responsibility Accounting System:

1) A budget is used to communicate expectations

2) Operating reports which compare budget to actual results are prepared for each period. Unit managers should know the variances and work to correct issues.

3) Reports provide information on quantitative and non-quantitative items

Responsibility Centers

A part or activity of the business
Management uses sales, cost, or profit data to evaluate performance

Cost Center

The cost center generates no revenue

Manager is responsible for costs and is expected to minimize costs while providing service to the organization

Examples: accounting, human resources, information systems

Revenue Center –
Manager is responsible for revenues with no control over sales prices

Example: a department in a retail store

Profit Center
The manager is responsible for revenues, sales prices, and costs

Often evaluated by comparing actual profits to budgeted profits

Investment Center –
The manager is responsible for revenue, cost, and investment of funds in operating assets

Example: the plant manager, the division manager, a free standing division or subsidiary of a firm

Support Departments: Service and Administrative Departments

Provide one or more functional tasks to other internal units

Support department costs must be covered by sales of products or services
of other revenue generating units.

Service: provides a specific functional task to other internal units/departments

Administrative: performs activities that benefit the entire organization

Support costs must be allocated to the other units of the company based on:
1) Benefit received
2) Casual relationship factors between units
3) Fairness
4) Ability of revenue-producing units to bear costs

Methods for Allocating Support Department Costs:

1) Direct Method:
Allocate based on a percentage of a cost driver to revenue generating departments.

2) Step Method:
Specify a “benefits provided” ranking used to allocate support costs to cost units and revenue generating units

Uses the inter-relationship between cost centers and revenue producing departments

3) Algebraic Method:
Use complicated mathematical calculations
Very company specific

4) Ability of revenue-producing units to bear costs
The units with the highest profits receive the most costs
Very company specific

The algebraic method and allocating based on profitability are not covered on the website