D. EXCERPTS FROM DIVISIONAL PERFORMANCE: MEASUREMENT AND CONTROL, BY DAVID SOLOMONS DIVISIONAL PERFORMANCE measurement and control DAVID SOLOMONS Professor of Accounting Wharton School of Finance and Commerce RICHARD D. IRWIN, INC., Homewood, Illinois IRWIN-DORSEY LIMITED, Nobleton, Ontario 1965 by Financial Executives Research Foundation, Inc. All rights reserved. No part of this book may be reproduced in any form without prior written permission This edition published by arrangement with the Library of Congress Catalog Card No. 65-28460 Printed in the United States of America Preface The organizational structure of a corporation is the result of many factors. As sales volume grows, and as product lines diversify, the divisionalized form of organization becomes a logical one for many corporations. But progress inevitably brings problems (just as the resolution of problems brings progress) and the change from a oneunit operation to a multiunit operation means that management must operate under difficult ground rules. The reporting of performance of divisions, and the rating of a division manager and their assistants based on division earnings, created a situation in which a conflict of interest arose. A general manager might make a decision which benefited his division's earnings and his personal compensation but which might not be the best decision from the company viewpoint. Moreover, division managers objected to the reduction of their earnings through accounting practices which were designed to reduce the payment of taxes in the current year, by reason of increased depreciation or other charges which reduced book earnings. As a result of this tax accounting, cash flow would be increased but the net income on which performance was based would be decreased. Then other decisions affecting relations between divisions might increase earnings of one division at the expense of another division and perhaps also the company. These questions needed investigation and research to suggest acceptable solutions. In view of the importance of the divisionalized corporate structure, the Trustees of the Research Foundation decided, in 1961, that there was need for a definitive study concerned with the accounting control of decentralized business operations. Such operations would include not only those which are geographically separate from the controlling center (distant plants, branch offices, etc.) but also those separated from the controlling center organizationally rather than geographically (e.g., autonomous divisions, subsidiary companies, and service establishments). Such a study was not intended to be a mere empirical recital of current practices but, rather, an eclectic view in which the researcher's views would have equal weight with the best practices observed. It was likely that in some areas there probably would be no practices which adequately and satisfactorily dealt with the questions involved. In this way the Trustees felt the report of the researcher would truly enable the reader to gain insights into ways of measuring and controlling divisional performance. To Professor Solomons, for his research and for his original thinking, and to the members of the Steering Committee and the Review Panel listed on page x of this book, the Trustees of the Research Foundation gratefully acknowledge their appreciation for the combined constructive effort which has developed in this area. Dudley E. Browne, President Financial Executives Research Foundation 1965-1966 |