Question

As the senior accountant at Jackson Quality Sportswear (JQS), which manufactures sports attire for men, women, youth, and children, your role with the budget process continues.

You are very pleased with how well the budget workshop held on February 21^st went. Department managers came, were engaged, and asked a number of important questions.

Jacob Reynolds advised department managers that you would follow up in a memo to address a few of the department managers’ questions.

Department managers asked:

1. What is decentralization?
2. What does the current organizational chart of the organization look like based on the entire organization? JQS falls under the clothing division of the corporate headquarters, Eagle Holding Company. The only other division is sport equipment.   
3. What responsibility center will the department managers be evaluated on? Provide details of this type of cost center.
4. What are responsibility reports and the controllability concept?
5. What is managerial performance measurement?

In consideration of the background, prepare a memo in a Word document to submit to the department managers with a cc to the controller.

• An introduction paragraph advising department managers that your memo is addressing questions stemming from the budget workshop held on February 21^st is needed.
• In responding to questions, you will want to begin your discussion by explaining decentralization.
• Department managers requested a copy of the current organizational chart. Please insert a diagram of the organizational chart. You can insert shapes in your memo, prepare in a Word table, or Excel with a copy and paste. A general flow description will work. Department managers represent the sales department, production department, research and development department, and the accounting department. The production department consists of the assembly department, ink and lettering department, and finishing department.
• Then address the remaining questions outlined above.
• End your memo with a closing paragraph.

Answer 1

MEMO

Dear Management,

With reference to the questions stemming from the budget workshop held on February 21^st , we hereby address with the same.

Decentralization:

It is the process by which the activities of an organization, particularly those regarding planning and decision making are distributed or delegated away from a central, authoritative location or group. It is a specific form of organizational structure where the top management delegates decision-making responsibilities and daily operations to middle and lower subordinates. The top management can thus concentrate on taking major decisions with greater time. Business houses often feel the requirement of decentralization to continue efficiency in their operation.

Organizational Structure

Eagle Holding Company Clothing Division Sport Equipment IQS (Jackson Quality Sportswear) Sales Dept. Production Dept. Research and Development Dept. Accounting Dept.

Responsibility Accounting:

It is the collection, summarization and reporting of financial information where individual manager is held accountable for certain costs, revenue or assets of the company. It is the apt where top management has delegated authority to make decisions. The idea behind responsibility accounting is that each manager’s performance should be judged by how well he or she manages those items under his or her control.

Types of Responsibility Centres:

Generally an organization classifies its various departments or divisions into following four categories for the purpose of performance evaluation.

1. Cost or Expense Centre: These are the responsibility where the manager of such a centre or division is responsible for the costs associated with that centre and hence the main focus is cost minimization.
2. Revenue Centre: These are the responsibility where the manager is totally concerned with raising revenue with no responsibility for costs. The Key measures used in appraising performance would be monitoring sales variance from budget.
3. Profit Centre: These are the responsibility where the manager of such a centre or division has responsibility for both revenue as well as costs incurred in his division. Thus, performance is measured in terms of difference between the revenue and costs that relate to a profit centre.
4. Investment Centre: These are the responsibility where the manager has responsibility for not just the revenues and costs relating to centre, but also the assets that generate these costs and revenues and the investment decisions relating to disposal and acquisition of assets.

Responsibility Report:

Every responsibility center within a company has to file a responsibility report to show that they are properly using funds and other resources. A cost center is no different. Responsibility reports for cost centers compare actual costs with flexible budget data. The reports show only controllable costs, and no distinction is made between variable and fixed costs. It shows contribution margin, controllable fixed costs, and controllable margin for each profit center.

There are many types of reports representing cost centres while measuring performance of each department such as Return on Investment(ROI), Residual Income, Economic Value added, Balance Score Card, Performance Prism, Triple Bottom Line methods etc.

Controllability Concept: It is one of the concept under Responsibility accounting. Conceptually, a manager should only be held responsible for those aspects of performance that he or she can control. For Example: In case of floods and droughts, it may impact on performance of company for which a manager cannot be held accountable as it is not under his control.

Managerial Performance Evaluation:

Performance Evaluation is directly linked to the organizational structure of a business. A distinction can be made between two categories of organizational structure for performance appraisal i.e., Functional and Divisional Organizational Structure.

A good performance measure should-

• Provide incentive to the divisional manager to make decisions which are in the best interests of the overall company (Goal Congruence)
• Only include factors for which the divisional manager can be held accountable.
• Recognize the long term objectives as well as short term objectives of the organization.

There are various ways to measure the performance of each division or dept which are as follows.

1. Financial Measures

• Return on Investment(ROI) Method
• Residual Income(RI) Method
• Economic Value Added(EVA) Method
• Shareholders Value Added(SVA) Method

2. Non-Financial Measures

• Balance Scorecard Method
• Performance Pyramid Method
• Building Block Method
• Performance Prism
• Triple Bottom Line(TBL) Method

Kindly revert in case of any Queries.

.....

Regards,

Name:XXXXXX

Senior Accountant

Jackson Quality Sportswear (JQS)

E-mail:XXXXXXXX

Phno.XXXXXXXX