Chapter 11
An alternative is to use the
Performance Measurement in Decentralized
Organizations
Cost Center
-manager has control over costs
- examples: servicing departments such as
accounting, financing, general administration,
legal and personnel
-the managers are expected to minimize costs
while providing the level of products and
services demanded by other parts of
organizations
-standard costs variances and flexible budget
variances are often used to evaluate cost
centers.
Profit Center
-manager has control over both costs and
revenue
-the managers are often evaluated by
comparing actual profit to targeted or budgeted
profit
Investment Center
-manager has control over cost, revenue, and
investments in operating assets
-managers are often evaluated using ROI or
Residual income measures
-responsible for earning adequate ROI
*The higher a business segment’s ROI, the
greater the profit earned per dollar invested in
the segment’s operating assets.
Net Operating Income (NOI) is income before
interest and taxes and sometimes referred to as
EBIT. NOI is used in the formula because the
base consists of operating assets.
Operating assets include cash, A/R, inventory,
PPE and all other assets held for operating
purposes. Most companies use the net book
value of depreciable assets to calculate average
operating assets.
gross cost of the asset, which ignores
accumulated depreciation.
*Excessive funds tied up in operating assets
depress turnover and lower ROI.
*ROI can be compared to the returns of other
investment centers in the organization, the
returns of other companies in the industry, and
to the past returns of the investment center
itself.
Residual Income (RI) is the met operating
income that an investment center earns above
the minimum required return on its operating
assets.
RI= NOI – (Average OA x Minimum required
Rate or return)
Economic Value Added (EVA)- is an adaptation
of residual income that has been adopted by
many companies.
*When residual income or EVA is used to
measure performance, the objective is to
maximize the total amount of residual income
or EVA, not to maximize ROI.
*Residual income approach has one major
disadvantage. It can’t be used to compare the
performance of divisions of different sizes.
Delivery Cycle Time
-the amount of time from when a customer
order is received to when the completed order
is shipped.
Delivery Cycle Time= Wait time + Throughput
time
Throughput (Manufacturing Cycle) Time
-the amount of time required to turn raw
materials into completed products.

*Manufacturing cycle time is composed of:

A. Process time- amount of time work is actually
done on the product
B. Inspection time- amount of time spent
ensuring that the product is not defective
C. Move time- time required to move materials
or partially completed products from
workstation to workstation
D. Queue time- amount of time a product
spends waiting to be worked on, to be moved,
to be inspected, or to be shipped.

Manufacturing Cycle Time (MCE)

MCE= Process time

Throughput time

Financial measures such as ROI and residual

income, and operating measures may be
included in a balanced scorecard.

Balance Scorecard
-consists of integrated set of performance
measures that are derived from and support a
company’s strategy.