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Managerial Accounting: What Is Decentralizing?

Decentralization is the process of moving decision-making powers down the chain of command. In a highly decentralized organization, frontline managers and staff often make important decisions. On the other hand, in a highly centralized organization, senior managers at the top of the organization chart make the decisions.

Decentralization offers several benefits:

  • Large corporations may need to oversee many diverse subsidiaries, making it impossible for a top-level manager to call all the shots.

  • Frontline employees usually have closer access to the information needed to make decisions, enabling them to respond more quickly than senior managers can.

  • Decentralization empowers employers to make more independent decisions with less red tape from senior managers, often improving employee morale.

  • It facilitates speedy customer service because it doesn’t require employees to wait for supervisor approvals.

As an example of decentralization, many discount stores train and empower service desk employees to decide which customer returns to accept and which to reject. After all, those folks should best know which returns appear reasonable, and anyway, the dollar value of each return is low.

A more centralized organization would impose stricter requirements on which returns a service desk employee can or can’t accept, leaving very little to the employee’s own judgment.

That said, decentralization has some problems, so it isn’t for every organization. Decentralized organizations often must devote duplicate assets and duplicate efforts to get things done. Furthermore, decentralization can make it difficult for senior managers to fully monitor and control a large number of frontline employees making decisions. As such, poor or self-interested decisions may lead to errors or even fraud.

For example, when issuing home mortgages, most banks require that a central department approve every mortgage applicant. Although this process delays the application process (and damages the perception of customer service), it also reduces the proportion of bad loans.

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