Decentralization

1
Decentralization

• Budgeting and Performance Evaluation

2
Decentralization The Major Issues

• The degree of decentralization
• Performance measurement
• Management compensation
• Budgeting
• Responsibility Centers
• The setting of transfer prices

3
Reasons for Decentralization

• There are many reasons to explain why firms
  decide to decentralize, including
• 1. better access to local information
• 2. cognitive limitations
• 3. more timely response
• 4. focusing of central management
• 5. training and evaluation
• 6. motivation
• 7. enhanced competition

4
Incentive Pay for Managers

• Why would managers not provide good service?
  There are three reasons
• 1. They may have low ability.
• 2. They may prefer not to work hard.
• 3. They may prefer to spend company resources on
  perquisites.

5
Management Compensation
What Method?

• Cash Compensation
• Non-cash Compensation

6
Components of the Compensation Policy

• The level of compensation
• The composition of the pay package
• The relationship between pay and performance

7
Measuring Performance Objective vs Subjective
measures

• Objective measures
• Subjective measures

8
Pay-for-performance

• Salary
• Bonuses and rewards
• Promotions
• Fringe Benefits
• Profit Sharing
• Stock based compensation

9
Why Do Incentives Fail

• Pay is not a motivator
• Rewards Punish
• Rewards rupture relationships
• Rewards ignore reasons
• Rewards discourage risk taking
• Rewards undermine interest

10
Brief Introduction to Budgets

• Types of budgets 1. Physical 2. Monetary
• Role of budgets in organizations 1. Assign
  decision rights 2. Targets for performance 3.
  Part of the control system

11
Two Dimensions of Budgeting

• 1. How is the budget prepared?
• 2. How is the budget used to implement the
  organizations plan.

12
Master Budget

• A master budget can be divided into operating and
  financial budgets.
• Operating budgets describe the income-generating
  activities of a firm sales, production, and
  finished goods inventories.
• Financial budgets detail the inflows and outflows
  of cash and the overall financial position.

13
The Operating Budget
The operating budget consists of a budgeted
income statement accompanied by the following
support schedules

• Sales budget
• Production budget
• Direct materials purchases budget
• Direct labor budget
• Overhead budget
• Ending finished goods inventory budget
• Cost of goods sold budget
• Marketing expense budget
• Research and development expense budget
• Administrative expense budget

14
The Financial Budgets

• The usual financial budgets prepared are
• The cash budget
• The budgeted balance sheet
• The budgeted statement of cash flows
• The budget for capital expenditures

15
Flexible and Static Budgeting

• Static Budgeting is a budget for a particular
  level of activity.
• Flexible Budgeting is a budget that provides a
  firm with the capability to compute expected
  costs for a range of activity

16
The Uses of Flexible Budgeting

• The flexible budget can be used to prepare the
  budget before the fact for the expected level of
  activity.
• Flexible budgeting can be used to compare what
  costs should have been for the actual level of
  activity.
• Flexible budgeting can help managers deal with
  uncertainty by allowing them to see the expected
  outcomes for a range of activities.