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Managerial Accounting
Segment Reporting and
Decentralization. Concept of Decentralization and preparation of
segment reports. Advantages and disadvantages of decentralization
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Segment Reporting and Decentralization:
(Concepts of Decentralization and segment
reporting )
Decentralization:
A decentralized organization is one in which decision making is not confined
to a few top executives but rather is spread through out the organization, with
managers at various levels making key operating decisions relating to their
sphere of responsibility. Decentralization is a matter of degree, since all
organizations are decentralized to some extent out of necessity.
Strongly decentralized organization is one in which even the lowest-level
managers and employees are empowered to make decisions. In a strongly
centralized organization, lower-level managers have little freedom to make a
decision. Although most organizations fall somewhere between these two extremes,
there is a pronounced trend toward more and more decentralization
Advantages and Disadvantages of Decentralization:
Advantages of Decentralization:
- Top management is relieved of much day to day problem solving and is left
free to concentrate on strategy, on higher level decision making, and on
coordinating activities.
- Decentralization provides lower level managers with vital experience in
making decisions. Without such experience, they would be ill prepared to make
decisions when they are promoted into higher level position.
- Added responsibility and decision making authority often result in
increased job satisfaction. Responsibility, and the authority that goes
without it, makes the job more interesting and provides greater incentives for
people to put out their best effort.
- Lower level managers generally have more detailed and up-to date
information about local condition than top management. Therefore decisions of
lower level managers are often based on better information.
- It is difficult to evaluate a manager's performance if the manager is not
given much latitude in what he or she can do
Disadvantages of Decentralization:
- Low level managers may make decisions without fully understanding the "big
picture". While top level managers typically have less detailed information
about local operations than the lower level managers, they usually have more
information about the company as a whole and should have a better
understanding of the company's strategy.
- In a truly decentralized organization, there may be a lack of coordination
among autonomous managers. This problem can be reduced by clearly defining the
company's strategy and communicating it effectively throughout the
organization.
- Lower level managers have objectives that are different from the
objectives of the entire organization. For example, some managers may be
interested in increasing the size of their departments than in increasing the
profits of the company. To some degree this problem can be overcome by
designing performance evaluation system that motivate managers to make
decisions that are in the best interest of the company.
- In a strongly decentralized organization, it may be more difficult to
effectively spread innovative ideas. Someone in what part of the organization
may have a traffic idea that would benefit other parts of the organization,
but without strong central direction the idea may not be shared with, and
adopted, by other parts of the organization
Decentralization and Segment Reporting:
Effective decentralization requires segmental reporting. In addition to the
companywide income statement, reports are needed for individual segments of the
organization. A segment is a part or activity of an organization about which
managers would like cost, revenue, or profit data
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