There are several advantages of a Decentralized Organization:

1.   By spreading the burden of decision making among many levels of management, top management is relieved of much day-to-day problem solving and is left free to concentrate on long-range planning and coordination.

2.   Decisions are best made at the level in an organization where a problem arises rather than by top managers who are unfamiliar with day-to-day operations.  As a company grows, and becomes more than a “mom and pop” operation, a vast variety of decisions are processed more effectively and efficiently at local levels.

3.   Decentralization provides a more effective basis for measuring a manager’s performance, since through decentralization, he or she has power to control their area’s results.

4.   Allowing managers greater decision-making control over their areas provides excellent training as these managers rise in the organization.

5.   Added responsibility and decision-making authority often result in increased job satisfaction and provide greater incentive for the manager of an area to put forth his or her best efforts.

that managers are evaluated on the basis of items under their control (the manager of division X is evaluated based on the results of division X and not on the results of division Y). 

As part of responsibility accounting, revenues and expenses are assigned to segments in order to see:

1.   Where problems are and

2.   For evaluation purposes.  

Key features of a segmented income statement are as follows: x

1.   Contribution format (divided by behavior, not function)

2.   Identification of controllable versus uncontrollable expenses (controllable TFC and non-controllable TFC)

3.   Segmented reporting, which shows income statements for the company as a whole and for each of its major segments (Divides the “Total Company” into various parts/segments).These parts/segments can be anything for which cost data exists i.e. manufacturing divisions (Buick, Pontiac), sales territories (East, West, North, South), groups or product lines (milk, ice cream, cheese, yogurt, etc.).  

Sales Revenue

- Variable Costs

Segment Contribution Margin

- Controllable Traceable Fixed Costs

Controllable Segment Margin

- Non-controllable Traceable Fixed Costs

Segment Margin (traceable)

- Common Fixed Costs

•  reflects the impact of variable operating expenses on sales.

•  used to make short-run decisions like whether the division should drop a certain product or line.

1.   Advertising campaigns for that segment – “Buy a Buick” (traceable to the Buick Division)

2.   Salary of the Buick Division president

Traceable Fixed costs are divided further into:

Controllable Traceable Fixed Costs

Non-controllable Traceable Fixed Costs 

a.   –Fixed costs that are controlled by the segment manager 

à Reflected in the Controllable Segment Margin.

Example:

1.            The Advertising campaign – “Buy a Buick.”

2.   Fixed General and Administrative expense (Office workers, supplies etc.)

b.   - Fixed costs traceable to the segment, but controllable by others

à   Reflected in the Traceable Segment margin.  (Reflects all traceable costs, whether controllable or not).

Example:

1.   Salary of Buick Division president (A manager typically does not set his own salary.

2.   Property Taxes (typically set by the state or local government)

Sales – Variable Costs - Controllable Traceable Fixed Costs

Sales – Variable Costs - Controllable Traceable Fixed Costs

 evaluate the segment manager because some costs that are traceable to a       segment may be completely beyond the influence of the segment manager.

Common Fixed Costs are costs incurred to benefit more than one segment. These costs are not charged to any particular segment because they arise from servicing the overall operating activities of the companies.  

1.    Costs of the corporate headquarters.

2.    CEO of the corporation

3.    Investor relations

4.    Corporate wide advertising

“Buy a GM car.” vs. “Buy a Buick”                                                                                                                                                                                                      

***Important Note: Fixed costs which are traceable on one segmented report may become common if the company is divided into smaller segments.**** x

Traceable Fixed Costs become Common Fixed Costs as you divide into smaller and smaller segments. x