Learning Objectives After reading and studying Chapter 13, you should be able to answer the following questions: Which factors determine whether a firm should be decentralized or centralized? How are decentralization and responsibility accounting related? What are the four primary types of responsibility centers, and what distinguishes them from each other? How are revenue variances computed? Why and how are support department costs allocated to operating departments? What types of transfer prices are used in organizations, and why are such prices used? What difficulties can be encountered by multinational companies using transfer prices? Terminology Administrative Department: an organizational unit that performs management activities that benefit the entire organization and include top management personnel, legal, payroll, insurance, and organization headquarters Advance pricing agreement: a binding contract between the IRS and a company that provides details of how a transfer price is to be set and establishes that no adjustments or penalties will be made if the agreed-upon methodology is used Algebraic method: a method of allocating support department costs that considers all interrelationships of the departments and reflects these relationships in simultaneous equations Benefits-provided ranking: a listing of support departments in an order that begins with the one providing the most service to all other corporate areas and ends with the support department providing the least service to all other support areas Centralization: term used to describe an to decision making in which top organization’s approach management retains the major portion of decision-making authority Cost center: a responsibility center in which the manager has the authority only to incur costs and is specifically evaluated on the basis of how well costs are controlled Decentralization: is a transfer of authority, responsibility, and decision-making rights from the top to the bottom of the organization structure
Learning Objectives After reading and studying Chapter 13, you should be able to answer the following questions: Which factors determine whether a firm should be decentralized or centralized? How are decentralization and responsibility accounting related? What are the four primary types of responsibility centers, and what distinguishes them from each other? How are revenue variances computed? Why and how are support department costs allocated to operating departments? What types of transfer prices are used in organizations, and why are such prices used? What difficulties can be encountered by multinational companies using transfer prices? Terminology Administrative Department: an organizational unit that performs management activities that benefit the entire organization and include top management personnel, legal, payroll, insurance, and organization headquarters Advance pricing agreement: a binding contract between the IRS and a company that provides details of how a transfer price is to be set and establishes that no adjustments or penalties will be made if the agreed-upon methodology is used Algebraic method: a method of allocating support department costs that considers all interrelationships of the departments and reflects these relationships in simultaneous equations Benefits-provided ranking: a listing of support departments in an order that begins with the one providing the most service to all other corporate areas and ends with the support department providing the least service to all other support areas Centralization: term used to describe an organization’s approach to decision making in which top management retains the major portion of decision-making authority Cost center: a responsibility center in which the manager has the authority only to incur costs and is specifically evaluated on the basis of how well costs are controlled Decentralization: is a transfer of authority, responsibility, and decision-making rights from the top to the bottom of the organization structure