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Tools for Enterprise Performance Evaluation

1. Responsibility Accounting and Management by Exception

Perhaps you have worked some of the questions and problems accompanying this text. What purpose do they serve? After all, they are actually quite redundant with the material in the text. Hopefully, you will see this question as merely rhetorical. The questions and problems serve as a self test to help you identify areas where your understanding is not clear. They provide feedback on areas where additional study is needed. Such "performance evaluations" are an important part of managing and improving your education.

Clearly, your professors rely on some form of performance evaluation in assigning grades. This is one of the least desirable tasks for most educators. But, it is through this feedback method that students are able to sense areas of strength and weakness, as well as providing a key "motivator" to study and learn. Excellent students are rewarded. Poor students are signaled to work harder or consider alternative fields of study. Performance evaluations can be harsh, but are generally viewed as necessary in striving toward an end result. As you will see, businesses must also adopt performance evaluation methods.

Earlier chapters have focused on techniques used for costing products and services, understanding cost behavior, budgeting, and so forth. These basic devices are essential to a well managed organization. But, one must also be mindful that managers must be held accountable for the results of their decisions and related execution. Without performance-related feedback, the business will not perform at its best possible level, and opportunities for improvement may go unnoticed.

Given that managers must be held accountable for decisions, actions, and outcomes, it becomes very important to align a manager's area of accountability with their area of responsibility. The "area" of responsibility can be a department, product, plant, territory, division, or some other type of unit or segment. Usually, the attribution of responsibility will mirror the organizational structure of the firm. This is especially true in organizations that have a decentralized approach to decision-making.

1.1. Centralized VS. Decentralized Decision-Making

Sometimes by plan, and sometimes simply as a result of top managements' leadership style, organizations will tend to gravitate to either a centralized or a decentralized style of management. With a centralized style, the top leaders make and direct most important decisions. Lower-level personnel execute these directives but are generally powerless to independently make policy decisions. A centralized organization is benefited by strong coordination of purpose and methods, but it has some glaring deficiencies. Among these are the stifling of lower-level managerial talent, suppression of innovation, and reduced employee morale.

Many contemporary business successes have occurred in highly decentralized organizations. Top management concentrates on strategy, and leaves the day-to-day operation and decision-making tasks to lower-level personnel. This facilitates rapid "front-line" response to customer issues and provides for identifying and training emerging managers. It can also improve morale by providing each employee with a clear sense of importance that is often lacking in a highly centralized environment. Decentralization can prove a fertile ground for cultivating new and improved products and business processes.

1.2. Responsibility Centers

A decentralized environment results in highly dispersed decision making. As a result, it is imperative to monitor and judge the effectiveness of each manager. This is easier said than done. Not all units are capable of being evaluated on the same basis. Some units do not generate any revenue; they only incur costs in support of some necessary function. Other units that deliver goods and services have the potential to be assessed on the basis of profit generation.

As a generalization, the part of an organization under the control of a manager is termed a "responsibility center." To aid performance evaluation it is first necessary to consider the specific character of each responsibility center. Some responsibility centers are cost centers and others are profit centers. On a broader scale, some are considered to be investment centers. The logical method of assessment will differ based on the core nature of the responsibility center.

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