April 26 2010
This presentation is the property of its rightful owner.
Sponsored Links
1 / 19

April 26, 2010 PowerPoint PPT Presentation


  • 86 Views
  • Uploaded on
  • Presentation posted in: General

April 26, 2010. Decentralization, Profitability and ROI. Decentralization – what is it? Advantages and disadvantages Responsibility Centers Cost Centers Profit Centers Investment Centers Allocating costs equitably ROI & Residual Income. Today’s Agenda.

Download Presentation

April 26, 2010

An Image/Link below is provided (as is) to download presentation

Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author.While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server.


- - - - - - - - - - - - - - - - - - - - - - - - - - E N D - - - - - - - - - - - - - - - - - - - - - - - - - -

Presentation Transcript


April 26 2010

April 26, 2010

Decentralization, Profitability and ROI


Today s agenda

Decentralization – what is it?

Advantages and disadvantages

Responsibility Centers

Cost Centers

Profit Centers

Investment Centers

Allocating costs equitably

ROI & Residual Income

Today’s Agenda


What is decentralization

Decision making authority is spread throughout the organization

Versus all decisions being made at the most senior level

Large organizations need to decentralize decision making to at least to some extent

Lower level employees are empowered

What is Decentralization?


Decentralization in organizations

Decentralization in Organizations

Benefits of

Decentralization

Top management

freed to concentrate

on strategy.

Lower-level managers

gain experience in

decision-making.

Decision-making

authority leads to

job satisfaction.

Lower-level decision

often based on

better information.

Lower-level managers can respond quickly to customers.


Decentralization in organizations1

Decentralization in Organizations

May be a lack of

coordination among

autonomous

managers.

Lower-level managers

may make decisions

without seeing the

“big picture.”

Disadvantages of

Decentralization

Lower-level manager’s

objectives may not

be those of the

organization.

May be difficult to

spread innovative ideas

in the organization.


Responsibility centers

In a Decentralized structure, organizations are divided into Responsibility Centers

Allows tracking of performance of those who are making the decisions

There are three types:

Profit Center

Measure on Profit & Loss, ROI

Cost Center

Measure on level of costs

Investment Center

Measure on ROI, for example

Responsibility Centers


Responsibility centers examples

Investment Centers

Cost Centers

Responsibility Centers - Examples

Profit Centers

?


Segmented reporting

Each Responsibility Center may be segmented into logical units; eg,

Regions

Retail Outlets

Business Divisions

This is done to track performance at different levels

It isolates performance – good and bad

Costs must be fairly allocated

Challenging to allocate common costs

Note: Increasingly GAAP requires segmented reporting in certain cases

Segmented Reporting


Allocating costs to business segments

Traceable Costs

Costs that are directly traceable to the segment

Eg, staff costs for the Western region

These can be fixed or variable costs

Common Costs

Costs that are shared among all segments

Eg, cost of centralized purchasing department

These costs must be allocated in some manner acceptable to those whose performance is being measured

Allocating Costs to Business Segments


Measuring performance

Measuring Performance

  • Cost Centers

    • Measured on level of costs against budget

  • Profit Centers

    • Measured on Profit & Loss against budget

    • And possibly ROI

  • Investment Centers

    • Measured on ROI and Residual Income

  • ROI provides incentive to invest for increasing levels of profitability

  • Residual Income provides incentive to invest for increasing levels of income above a certain ROI threshold


Return on investment roi formula

Net operating income

Average operating assets

ROI =

Return on Investment (ROI) Formula

Income before interest

and taxes (EBIT)

Cash, accounts receivable, inventory,

plant and equipment, and all other

assets held for operating purposes.


Improving roi

Net operating income

Average operating assets

ROI =

Improving ROI

  • Three ways to improve ROI:

    • 1. Reduce expenses

    • 2. Increase Revenue

    • 3. Reduce Operating Assets


Roi an example

ROI – an example

  • What is the Gross Margin?

    • & GM %?

  • What is Operating Income?

    • Operating Income %?

  • Calculate ROI


Roi an example1

ROI – an example

  • ROI is 19%

  • Is that good?

  • How can it be improved?


Return on investment roi formula1

Net operating income

Average operating assets

ROI =

Net operating income

Sales

Margin =

Sales

Average operating assets

Turnover =

Margin  Turnover

ROI =

Return on Investment (ROI) Formula


Calculating residual income

Calculating Residual Income

(

)

  • ROI provides incentive to invest for increasing levels of profitability

  • Residual Income provides incentive to invest for increasing levels of income above a certain ROI threshold


Calculating residual income1

Calculating Residual Income

  • Jack Company can invest Yuan 20 million in assets and expects it will generate Yuan 5 million per year in operating income

  • The ROI threshold is 20%

  • Should the company proceed with the investment?


Transfer pricing

Transfer Pricing

  • Transfer pricing is required when one part of an organization transfers goods or services to another part

    • A price needs to be determined in order to measure the performance of each group

  • Transfer Prices can be determined in a number of ways

    • Negotiated between the two departments

    • Cost

    • Fair Market Value

  • In any case, the Transfer Price must be fair in order to maintain motivation and appropriately measure and reward managers


Tutorial

Tutorial


  • Login