Decentralization in Accounting: Advantages & Disadvantages

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  • 0:03 What Is Decentralization?
  • 0:36 Advantages of Decentralization
  • 2:44 Disadvantages of…
  • 4:33 Lesson Summary
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Lesson Transcript
Instructor: Ryan Morales
More companies are veering away from the traditional centralized management approach and are decentralizing operations. Continue on to learn more about the advantages and disadvantages of decentralization.

What Is Decentralization?

From experience, you've probably learned that when you work in a group, you become more motivated to participate if you're given some sort of decision-making authority. Somehow, you feel empowered. As a result, you tend to do more and give more to the group.

In business, increased motivation is also achieved in a decentralized organization. Decentralization is the division of an entity into smaller manageable units. Lower level managers are endowed with decision-making authority and are given the responsibility to run their own departments or business units.

Advantages of Decentralization

Decentralization comes with many advantages…

First it helps managers make better, more timely decisions. Lower level managers have first-hand information and experience with how their departments operate, and are more acquainted with the common problems and concerns of their departments. This makes them better able to respond to local circumstances compared to their senior counterparts. Lower level managers also work more closely with employees and customers; this more proximate position, along with the absence of bureaucratic hierarchy, allows them to make timely decisions and respond promptly to issues at hand.

Second, it eases the burden on top management. Decentralization frees senior management from the burden of running the day to day operations of the business. They're relieved of what others call management firefighting - that is, the day to day fixing of problems. Hence, senior management can focus their time and attention on more important management functions like long-term planning, dealing with major customers and suppliers, evaluating and making investment and financing decisions, etc.

Third, it empowers and motivates lower level management and employees. Giving lower level managers decision-making authority empowers them and motivates them to contribute more towards the attainment of the organization's goals. Further, decentralization and the granting of local autonomy actually promote closer, more integrated sub-units. This boosts employee morale as employees get more involved in the decision-making processes of their sub-units.

Fourth, it facilitates the development of junior management. The delegation of authority provides a good opportunity and training ground for junior managers. They get the opportunity to develop their talents and managerial skills, preparing them for senior management positions when the time comes.

Lastly, it facilitates diversification. A more centralized organization, where authority is concentrated in top management, would really find it difficult to diversify activities, products, and markets. A decentralized structure supports a diversified company. A company that is divided into sub-units can easily work around different markets, product lines, and segments.

Disadvantages of Decentralization

Decentralization also has some drawbacks to be aware of…

One of these is loss of control. Top management relinquishes control over certain areas of operations. Lower level managers are given this power. There is always the chance of authority abuse and mismanagement on the part of these lower level managers, especially if the company does not have an effective control and performance evaluation system.

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