Management Principles Quiz

Decentralization

• Delegation of decision-making authority to lower levels of an organization.
• Advantages:
  • Faster decision-making
  • Increased motivation for managers
  • Improved decision-making due to specialized knowledge
  • Flexibility
  • Increased employee satisfaction
• Disadvantages:
  • Lack of coordination
  • Increased costs
  • Potential for conflict
  • Potential for suboptimization

Segment Reporting

• Provides information about the performance of individual segments (product lines, divisions, regions).
• Used to evaluate segment performance and allocate resources.

Goal Congruence

• Alignment of individual manager's goals with organizational goals.
• Achieved through clear goals, incentives, and performance monitoring.

Motivation

• Willingness to exert effort towards a goal.
• Factors that motivate managers: financial incentives, challenging goals, opportunities for advancement.

Controllable Costs

• Costs influenced by a manager's decisions.
• Managers can increase or decrease these costs.
  • Example: A manager can increase sales by increasing marketing efforts.
  • Example: A manager can decrease costs by reducing the number of employees.

Non-controllable Costs

• Costs that cannot be influenced by a manager's decisions.
• Example: Cost of rent.

Direct Costs

• Costs easily traced to a specific product or service.
• Example: Direct materials and direct labor.

Common Costs

• Costs that cannot be easily traced to a specific product or service.
• Example: Rent and administrative overhead.

Responsibility Accounting

• An accounting system that assigns responsibility for revenues, costs, and assets to specific managers.
• Measures manager performance against budgets.

Responsibility Centers

• Sections of an organization headed by managers responsible for performance.
• Types:
  • Cost Center
  • Revenue Center
  • Profit Center
  • Investment Center

Cost Center

• Incurs costs but does not generate revenue.
• Manager has authority over costs.
• Example: Production department, maintenance department.

Revenue Center

• Generates revenue but does not have responsibility for production.
• Example: Sales department, marketing department.

Profit Center

• Generates revenue and incurs costs.
• Manager has authority over both costs and revenues.
• Example: Business unit, product line.

Investment Center

• Manager has authority over costs, revenues, and investments.
• Performance measured by Return on Investment (ROI).
• Example: Business unit, division.

Segmented Income Statement

• Breaks down income and expenses into different segments (product lines, geographic regions, customer types)
• Helps managers understand segment performance and allocate resources.

Segment Manager Performance

• Measures the performance of an individual segment manager.

Segment Performance

• Considers the performance of the entire segment, not just the manager.

Segment Margin

• Controllable profit reported by an organizational unit or product line.
• Estimates the unit's short-term effect on overall organizational profit.

Divisional Performance Measures

• Return on Investment (ROI):
  • Formula: ROI = Operating Profit ÷ Average Invested Capital.
  • Measures the return on investment for an investment center.
  • Used to compare performance of investment centers.
• Du Pont Model:
  • Explains how ROI is affected by Profit Margin and Asset Turnover.
  • Formula: ROI = Profit Margin x Asset Turnover.
  • Breakdown:
    • Profit Margin: (Profit ÷ Sales).
    • Asset Turnover: (Sales ÷ Assets Invested).
• Residual Income (RI):
  • Formula: Residual Income = Operating Profit – (Target Rate x Asset Base).
  • Measures the profit earned above the target rate of return.
• Economic Value Added (EVA):
  • Formula: EVA = Net Operating Profit After Tax – (Cost of Capital % x Market Value of Invested Capital).
  • Similar to RI, but uses the market value of capital instead of book value.
  • Aligns shareholder interests with manager interests.

EVA vs. RI

• EVA uses market value of invested capital, while RI uses book value.
• EVA is more beneficial when there's a large difference between market value and book value.
• EVA is short-term focused, which can discourage long-term investments.
• EVA should be supplemented with long-term financial and non-financial performance measures.

Test your understanding of key management concepts such as decentralization, segment reporting, and goal congruence. This quiz covers the advantages and disadvantages of different management strategies and factors that influence motivation. Perfect for students and professionals looking to enhance their management skills!