Without such experience, they would be ill-prepared to make decisions when they are promoted into higher level positions. It describes the way in which power to take decisions is allocated among various levels in the organisational hierarchy. On the other hand, Decentralization refers to the dissemination of powers by the top management to the middle or low-level management. The organizational structure will be termed as centralized if the decision that are made at lower levels are supposed to pass the strict collection of rules, procedures, and policies and in case the decisions does not give the desired outcome, then they are referred to the higher level management. All the important decision and actions at the lower level, all subjects and actions at the lower level are subject to the approval of top management. In your school and within your local community, you were probably part of formal and informal groups. There may also be many purchases that are modified so they come in under a particular manager's authority level.
At the other extreme, in a strongly decentralized organization, lower-level managers have little freedom to make decisions. Disadvantages of Decentralisation : Decentralisation can be extremely beneficial. The human resources department for instance, does not directly generate revenues, but the department incurs costs--personnel costs, overhead, etc. Increase Social Net Product Decentralization may result in an increase in the managerial social net product, i. The degree of centralization and de-centralization can be affected by many factors like nature of operation, volume of profits, number of departments, size of a concern, etc.
. One primary disadvantage is in the area of cost control. For a small business, growth may create the need to decentralize to continue efficient operations. They are more acquainted with the common problems faced by their departments. Segment margin is segment revenues minus all attributable segment expenses.
This system operates under the idea that since lower level managers have the authority to make decisions, they should also be held accountable for the decisions they make. Decentralization is wider in scope and the subordinates responsibility increase in this case. The managers of cost centers are usually expected to minimize the costs while providing the level of services or the amount of products demanded by the other parts of the organization. In earlier times, centralization policy was the most commonly practiced in every organization to retain all the powers in the central location. They have full control over the activities of the middle or low-level management. In fact, decentralization is all extension of delegation. The concept of decentralization is related to the concept of delegation of authority.
Diversification of activities Decentralization reduces the burden of the chief executives with making routine decisions. At one extreme, a strongly decentralized organization is one in which even the lowest-level managers and employees are empowered to make decisions. In some cases, decentralization may not be possible at all. Responsibility Centers Cost Center A cost center is a unit which incurs costs but does not earn revenues. Decentralization is a type of organizational structure in which daily operations and decision-making responsibilities are delegated by top management to middle and lower-level mangers. According to Allen, Centralization is the systematic and consistent reservation of authority at central points in the organization. This implies that the cost center was able to work well within its budget in pursuit of its goals.
The growth of the company greatly depends on the talented executives. Investment centers are evaluated based on their return on investment and residual income. Develops the Quality of Managers The executives will get training and also opportunities to develop their talents. Definition and Explanation of Segment: A segment is a part or activity of an organization about which managers would like cost, revenue or profit data. Lesson Summary A decentralized organization is one in which most decisions are made by mid-level or lower-level managers, rather than being made centrally by the head of the company. This leads to quicker decision-making of lower level since decisions do not have to be referred up through the hierarchy.
This can be especially important if the company head is out of town frequently or becomes ill. Responsibility and the authority, that goes with it makes the job more interesting and provides greater incentives for people to put out their best efforts. It's the opposite of a centralized organization, in which all decisions are made at the top. Apart from that personal leadership and coordination can also be seen as well as work can also be distributed easily among workers. In a decentralized organization, the company is divided into responsibility centers. Each structure offers advantages and disadvantages for business owners.
So, the major question is not whether decentralisation should be implemented or not, the question is to which extent it should be adopted, what authorities are assigned to the subordinates and what authorities should remain with the top executives. On the other hand, full fledge decentralization is an indicator of no control over the activities of subordinates. Centralization of authority means the power of planning and decision making are exclusively in the hands of top management. Centralization and Decentralization are the two types of structures, that can be found in the organization, government, management and even in purchasing. Give the process a test run by leaving the business for a week or two — a vacation, perhaps — and evaluating the results when you return. It is the delegation of authority, at all the levels of management. Additional Considerations Business owners should carefully consider which type of organizational structure to use in their company.
In responsibility accounting, all significant variances, whether favorable or unfavorable, should be investigated. Decentralization of authority is a management philosophy through which managers at middle and lower level are given the authority to take decisions and actions on matters realizing to their respective area of work. Effective decentralization requires segment reporting. Degree of Decentralisation : The degree of decentralisation is determined by: a Nature of the authority delegated, b How far down in the organisation it is delegated, c How consistently it is delegated. Involves Systematic and consistent reservation of authority. Decentralization also minimizes the delay in communicating information.