Segment Reporting and Decentralization: Uaa - Acct 202 Principles of Managerial Accounting Dr. Fred Barbee
Segment Reporting and Decentralization: Uaa - Acct 202 Principles of Managerial Accounting Dr. Fred Barbee
Segment Reporting and Decentralization: Uaa - Acct 202 Principles of Managerial Accounting Dr. Fred Barbee
Decentralization
Controlling
Controlling Operations
• Management by exception
• Responsibility Accounting
• Delegation of authority
• Management by walking around
Responsibility Accounting
• . . . is a reporting system in which a cost
is charged to the lowest level of
management that has responsibility for
it.
Installing Responsibility Accounting
• Create a set of financial
performance goals (budgets).
• Measure and report actual
performance.
• Evaluate based on comparison of
actual with budget.
Responsibility Accounting
• Evaluation of responsibility centers
depends on . . .
– The extent of delegation of authority; and
– A manager’s preference
Centralization Vs. Decentralization
Decentralization . . .
• . . . the delegation of authority to the
lowest level of management
responsibility that can make decisions.
Centralization . . .
• . . . A centralized organization is one in
which little authority is delegated to
lower level managers.
Decentralization
• The more decentralized the firm, the
greater the need for control.
– Monitor employees
– Motivate employees
Advantages of Decentralization
A segment is any
part or activity of A Sales Territory
an organization
about which a
manager seeks
cost, revenue, or
profit data. A
A Service Center
segment can be
Cost, Profit, and Investments Centers
Responsibility
Centers
Working
DM
Capital Goods,
DL
Equipment Services, Ideas
MOH
Etc.
Cost, Profit, and Investments Centers
Cost Center
A segment whose
manager has
control over
costs,
but not over
revenues or
investment funds.
Responsibility Centers:
A Systems Perspective
Cost Center
Control only this
Evaluation . . .
• A cost center is evaluated by means of
performance reports (i.e., comparison of
actual with standard).
Performance Reports
Show the budgeted and actual
amounts, and the variances
between these amounts, of key
financial results appropriate for
the type of responsibility center.
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Segments Classified as Cost, Profit
and Investment Centers
Responsibility Centers:
A Systems Perspective
Profit Center
Control these
Cost, Profit, and Investments Centers
investment funds.
Other
A Profit Center . . .
• A profit center is evaluated by
means of contribution margin
income statements.
Segments Classified as Cost, Profit
and Investment Centers
Cost, Profit, and Investments Centers
Investment Center
A segment whose
manager has
control over costs,
revenues, and
investments in
operating assets.
Corporate Headquarters
Responsibility Centers:
A Systems Perspective
Investment Center
Control these
Investment Center
• An investment center is evaluated by
means of the Return on Investment
(ROI) or the Residual Income (RI) it is
able to generate.
Segments Classified as Cost, Profit
and Investment Centers
Responsibility Centers
Profit Center Vs. Investment Center
Cost of goods
sold consists of
variable
manufacturing
costs.
Fixed and
variable costs
are listed in
separate
sections.
Our approach to segment reporting uses the
contribution format.
Segment margin
is Television’s
contribution
to profits.
Traceable Common
Time
Inappropriate Methods of Allocating
Costs Among Segments
Arbitrarily dividing
common costs
among segments
Inappropriate
Failure to trace allocation base
costs directly
Income
Margin = --------------------
Sales
Return on Investment
• Where . . .
Sales
Turnover = ------------------------------
Invested Capital
Return on Investment
Income Sales
------------------------------ x ------------------------------
Sales Invested Capital
Income Sales
------------------------------
Sales
x ------------------------------
Invested Capital
Income
------------------------------
Invested Capital
= ROI
Measuring Income and Invested
Capital
Income Sales
------------------------------
Sales
x ------------------------------
Invested Capital
Return on Investment (ROI)
Formula
Income before interest
and taxes (EBIT)
Sales $500,000
$30,000 $500,000
-------------- --------------
$500,000
x $200,000
6% 2.5
x
= 15%
Disadvantages of ROI
• It can produce a narrow focus on
divisional profitability at the expense of
profitability for the overall firm.
• It encourages managers to focus on the
short run at the expense of the long
run.
Criticisms of ROI . . .
• ROI tends to emphasize short-run
performance over long-run profitability.
• ROI may not be completely controllable
by the division manager due to
committed costs.
Residual Income . . .
• . . . is the net operating income that
an investment center is able to earn
above some minimum rate of return
on its operating assets.
Residual Income = EBIT – Required Profit
Division A Division B
• Goal Congruence
• Segmental Performance
• Negotiation
• Capacity
• Cost Structure
• Taxes
Ways of Determining Transfer Prices