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Q1SE

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Horngren'S Financial And Managerial Accounting
Found in: Page 1356

Short Answer

Decentralization divides company operations into various reporting units. Most decentralized subunits can be described as one of four different types of responsibility centers.

Requirements

1. Explain why companies decentralize. Describe some typical methods of decentralization.

2. List the four most common types of responsibility centers, and describe their responsibilities.

(1) The decentralization can be done based on the characteristics which are geographic areas, customer base, product line, and business function.

(2) The four common responsibility centers are geographic areas, customer base, product line, and business functions.

See the step by step solution

Step by Step Solution

Step 1:Reasons for decentralization

The companies decentralize their operations because of the following reasons:

  1. When the company grows in size, it will become very difficult for one person to manage the daily operations of the business. So, they decentralize some of the operations of the business.
  2. Sometimes it is done to make top-level management more efficient as they will focus on important matters
  3. To provide better services to the customers of the business.

Decentralization can be done based on the following characteristics of business:

  1. Geographic Areas: The companies work in different areas, and different areas can be decentralized to various managers of the business.
  2. Customer base: Customers with different cultures or ideologies are distributed to various people of the company.
  3. Product line: There are different products offered by a company that needs decentralization.
  4. Business functions: Businesses have various functions such as production, sales, and marketing for which decentralization can be done.

Step 2:Four most common responsibility centers and their responsibilities

The most common responsibility centers are the following:

  1. Cost Center: The main responsibility of the cost center is to control the costs. They look after the cost incurred not the revenues.
  2. Revenue Center: Under the revenue center, the major responsibility is to generate revenue for the company.
  3. Profit Center: The manager of the profit center is responsible for the revenues and the cost of the business. The primary motive is to increase the profitability of the business.
  4. Investment center: The main motive of the manager of the investment center is making and investing it.

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