There are two types of organizational structures: a centralized organization and a decentralized organization. A decentralized organization is one where the lower levels of management are given a great degree of autonomy and independence in making decisions on matters under their responsibility.
A centralized organization is a structure where the top management, i.e. company executives, controls many activities and makes most decisions regarding the company's activities.
In a decentralized organization, a high degree of autonomy is given to lower levels of management. In this set-up, managers of subunits are granted the power to decide on matters within their areas of responsibility. When done right, this promotes employee empowerment and goal congruence.
Decentralized organizations promote employee empowerment. The benefits of decentralization include the following:
No one understands the needs of the subunit better than the manager of that subunit and the people running it. More timely decisions are made and implemented quickly since departmental matters are resolved immediately without the need of escalating them to the top management. Nonetheless, the decisions of the managers must be in line with the overall goals of the organization.
Goal congruence refers to a condition in which employees make decisions that help meet the overall goals of the organization. Managerial effort refers to the extend of determination from decision-makers to reach a common goal or objective.
A problem arises when a department or subunit performs actions that are beneficial to the subunit but are detrimental to the organization as a whole. This situation is known as sub-optimization. For example, decreasing costs may be beneficial to a cost center. However, the quality of products or services of the firm might be negatively impacted and be bad to the organization as a whole.
Decentralization has its benefits and costs. When implemented properly, it promotes a healthy environment both for managers and employees. The company's outside stakeholders such as customers and suppliers also benefit from more timely decisions.
Other key concepts in responsibility accounting and decentralization are: authority, accountability, responsibility, and controllability.
Authority is the power to demand performance from subordinates. Accountability is the duty to report to a superior. Responsibility refers to an obligation to perform. Controllability refers to the extent to which a manager influences activities, costs, revenues, and assets.