Behavioural Consequences In Responsibility Centres

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Performance management and control in responsibility centres

DIVISIONAL STRUCTURE

A divisional structure occurs when an organisation is structured in accordance with product lines or divisions, departments or geographical areas.

Typical aspects of divisional structure

  1. Headed by divisional managers responsible for their own resources

  2. Division has own organisation structure

  3. Decentralisation of decision-making process (but degree of decentralisation and freedom given to divisional managers can vary)

  4. Some departments remain centralised (administration etc.)

Advantages of divisional structure

  • Better decisions due to knowledge and uderstanding of the local specifics and conditions

  • Quicker decision-making due to shorter chain of command

  • Personal motivation of divisional managers to improve division performance

  • Top management is not overloaded by detailed day-to-day operating

  • Effective delegation of authority within the organisation

Disadvantages of divisional structure

  • Dysfunction of decision making if goal congruence is not retain

  • Some costs (typically the common costs for all divisions) may be very expensive on divisional level (payroll, accounting etc.)

  • Top management may lose control due to poor information

Behavioural implications

Inter-departmental disputes about transfer prices are likely to arise and these may need the intervention or mediation of head office to settle the problem. 

Head office management may then impose a price which maximises the profit of the company as a whole.

On the other hand, head office management might restrict their intervention to the task of keeping negotiations in progress until a transfer price is eventually settled. 

The more head office has to impose its own decisions on profit centres, the less decentralisation of authority there wilI be and the less effective the profit centre system of accounting will be for motivating divisional managers.

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