Performance Measurement in

Decentralized Organizations
 Decentralization in Organizations
In a decentralized organization, decision-making authority is spread throughout the
organization rather than being confined to a few top executives

Advantages Disadvantages

• Day-to-day problem solving to lower-level • Lower-level managers may make decisions

managers, top-level managers
• Empowering lower-level managers to make
decisions
• decision-making authority helps train lower-
level managers for higher-level positions
• Empowering lower-level managers
without fully understanding
• lower-level managers make their own decisions
independently of each other
• Lower-level managers may have objectives that
clash with the objectives
• Spreading innovative ideas may be difficult
Cost Center

The manager of a cost center has control over costs, but not
over revenue or the use of investment funds.

Profit Center

The manager of a profit center has control over both costs and
revenue, but not over the use of investment funds

Investment Center

The manager of an investment center has control over cost,

revenue, and investments in operating assets
 Evaluating Investment Center Performance

The Return on Investment (ROI) Formula

ROI= Net operating income/Average operating assets

• Net operating income is income before interest and taxes and

is sometimes referred to as EBIT
• Operating assets include cash, accounts receivable, inventory,
plant and equipment, and all other assets held for operating
purposes
Fortunately, ROI can also be expressed in terms of margin and
turnover as follows:

ROI= Margin*Turnover
Where,
Margin= Net operating income/Sales
And,
Turnover= Sales/Average operating assets
For example, suppose that the Montvale Burger Grill ROI= Margin*Turnover
expects the following operating results next month: Margin= Net operating income/Sales
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . BDT 100,000 Turnover= Sales/Average operating assets
Operating expenses . . . . . . . . . . . . . . . . . . BDT 90,000 ROI= (10,000/100,000)*(100,000/50,000)
Net operating income . . . . . . . . . . . . . . . . BDT 10,000 = 12.5*2
Average operating assets . . . . . . . . . . . . . BDT 50,000 = 25%
 Residual income

Residual income is the net operating income that an investment center earns above the
minimum required return on its operating assets.
 Throughput (Manufacturing Cycle) Time

The elapsed time from when production is started until finished

goods are shipped to customers is called throughput time

Delivery Cycle Time

The elapsed time from when a customer order is received until

the finished goods are shipped is called delivery cycle time
Thank You