UST AMV COLLEGE OF ACCOUNTANCY DECENTRALIZATION/ RESPONSIBILITY ACCOUNTING/ TRANSFER PRICING |A. Decentralized Organtzatlon = deelson-making Is not confined toa few top executive but rather is spread throughout the ‘organization, with managers at various levels making key operating decisions relating to their sphere of responsiblity. Sig's matter of degree since all organaations are decentralized to some extent out of, necessity Advantages: 1. "Top management i celleved of much day-to-day problem solving; left free to concentrate ‘on strategy, on higher level decision making and on coordinating activites. 2, Provides iower-evel managers with vital experience in making decisions. 3, Increased jo satisfaction brought by added responsibility and decision making authority. 4 Lower level dections are based on Better information, 'B. Responsibility Centers ‘ga subunit in an organization whose manager is held accountable fr specified financial results of the subunit activities.” ‘broadly defined as any part of an organization whose manager has control over cost, revenve, profit or Investment. 2s of responsibilty centers: fan orgenzational subunit whose manager is held accountable for costs {curred inthe subunit. Example: Painting department In an automobile plant. 2. Revenue center- manager s held accountable forthe revenue atribute tothe subunit. Example: the Reservation Department of an aie; Sales Department of a manufacture. 23. Profit center. manager ieheld accountable for profit. Since profit is affected by bath revere and cot, profit center manager are hela accountable for both revenue and ‘expenses. Example: a company-owned restaurant in fastfood chain. 44, investment centers manager fheld accountable fr the subunits profit andthe invested ‘apital used by the sbuni to generate its profit. A division of a large corporation is typlealy designated as an investment center. C. Goal congruence means a meshing of objectives, in which the managers throughout an ‘organization strive to achieve goals that are consistent with te goals set by top management, Goal congruence is important for organizational success Because managers often are unaware of the effects oftheir decisions on the organization’ other subunits. also, fe natural for people to be more concerned with the performance af thelr own subunit than with the effectiveness of the entite organfaation. In order for the otganization to be effective, Its important that everyone in fe be striving forthe same ultimate objectives. ‘Management-by-Objectives (MBO) philosophy, managers participate in setting goals that they hensive Co schieve; i used to evaluate performance in sehieving ther. The NBO approach i Consistent with an emphasis on obtalnin goal congruence throughout an organization. 'PRO FORMA: SEGMENTED INCOME STATEMENT Seles Revenue Lost Variable Costs and Expenses Segment Contribution Margin Less: Fixed Costs controllable by segment manager Profit Margin controllable by segment manager Less: Five Costs traceable to segment but non-controlable Segment Profi Margin D. investment center is a responsibilty-accounting center, the manager of which Is held ccourtable not ony for the investment center's profit but also fr the capital invested to earn That profit . Measuring Performance in investment Center 1, Return on Investment tater tax Income? Dvsional Asets ~ After tax income /SalesX Sales / Divisional Assets or 2 ncome/Invested Capita Income/Sales Revenue X Sales Revenve/Invested Capital most commonly used but may not be inline with goal congruence 1+ The main disadvantage of ROI is thot for on investment that earns a rate of return {reater than the company’ ost of raising coptal, the manager In charge of deciding ‘Sbout that investment may hove an incentive to reject tif the Investment would result Inreducing the managers ROLUST AMV COLLEGE OF ACCOUNTANCY 2. Residual Income ‘= Investment’s center profit: (Imputed interest rate onthe invested ca +The imputed Interest rate Is used in calculating residual income, but it Is nat ued in Computing ROL The imputed Interest rate reflects the firm's minimum required rate of Feturn on invested capital 1+ The residualincome measure eliminates this disadvantage by including In the res Income calculation the imputed interest rate, which reflects the firms cost of capital dy project that earns 2 return greater than the Imputed interest rate will show a postive residual Income. + Drawback: It should not be used to compare the performance of different-sized investment centers because It Incorporates a blas In favor of the larger Investment 3. Economle Value Added (EVA) Economic” Investment center's (Investment center's Investment center's) Value Added = after-tax operating income {total assets) ~ current liabilities X WACC {after tax cost) (Market Value) + (Cost of Equity) Market Value) WACC= —(of-debt capital) (of debt tal lt Market Value of debt * ‘Market value of equity Economic value added citfers from residual Income in its subtraction ofthe investment center's current liabilities and its specific use ofthe weighted.average cost of capital ‘+ EVA indicates how much shareholders’ wealth s created. + Total assets tess current llabilities: All divisional assets minus current lablities. This measure is appropriate when the division manager is allowed to secure short-term bank {oans and other short-term crect. This approach encourages investment-center managers {0 minimize resources tled up in assets and maximize the use of short-term credit to finance operations. ‘+ Itis important to make a distinction between an investment center and its manager, because in evaluating the manager's performance, only revenues and costs that the manager can control or significantly influence ‘should be included in the profit ‘measure. The objective of the managers performance measure is to provide an incentive for that manager to adhere to goal-congruent behavior. ‘= Inevaluatiog the investment center as a viable economic lavestment, all revenues and costs that are traceable to the investment canter should be considered, Controllability fe not an iste fn tis cate, Problem 1: RAGNAR Novelties sells merchandise through three etal outlets: Makatl, Manila and [Malabon and operates a general headquarter Io Quezon City. & review ofthe company’s Income ‘statement indieates is sales and profits. Managernent desires additonal insights about the Individual ‘Sores and has asked its newly hed intern, to prepare a segmented income statement based on the following information: Sales volume, sales price and purchase price data: Hakat an Sale volume 37,000 4,000, Unie selling price 18.00 18.50 Unit purchase price P85 P65 ‘The folowing expenses were incurred for sales commissions, local advertising, property taxes, management salaries and other nn-controlable (but traceable costs) — aia ania Taleban Sales Commissions om o , Local advertising Pe, S000 733,00 P72, 000 Local property tax 6,730 3,000 9,600 Sales manager sala i si 48,000) Store manager salaries E500. 35,500 37,000. ‘Other non-controllable cost 3.700 6,500 26,70 Local advertising decisions are made at the store manager's evel; the sales manager's salary In Malabon is determined by Malabon's store manager; In contrast, store manager salaries are set by RAGNAR'S vice president. Non-traceable fixed corporate expenses total P288,450. ‘The company uses a responsibility accounting system.UST AMV COLLEGE OF ACCOUNTANCY 5 Novelties alls ofthe probable cause of Prepare a segmented Income statement for Ra 2, Determine the weakest performing store and present an oor performance. 3, Assume that an opening had arisen at the Manila corporate headquarters and the company’s CEO desires to promote one of the three existing tore managers. In ‘evaluating the store manager's performance, should the CEO use the store's segment Contribution margin, the profit margin controllable by store manager or store's segment profit margin? Justity your answer. Problem 2: The following financial information were taken from the records of CDC Corporation, 'a divison of GALILEO FOOD Corporation for the year ended, December 31, 2019: sales 5,500,000 Les: Variable Costs and Expenses 3:575,000 Contribution Margin 1,925,000 Less: Direct Fixed Costs and Expenses 750,000 Segment Income 1,175,000 ‘The company used an average assets of P4,800,000 In 2019. The company's cost of capital fs 12%. compure: 1. Return on sales 2. assets Tumover 3. Return on investment 4 _ Residual Income 5. The president of GALILEO Corporation wants to double Its ROI in 2020 by increasing its return on sales by 50%. What is the expected asset turnover In 2020. Problem 3: The following data pertain to AB Division's most recent year of operations: Income 20,000,000 Sales Revenue 250,000,000 Average Investes capital 100,000,000 Compute: AB Division's sales margin, capital turnover, and return on investment. Demonstrate two ways the sales manager could imprave the division's ROI to 25%. ‘Assume that the company's minimum desiced rate of return on invested capita is 11%, what is the ‘residual income for the year? Problem 4: Omaha Grain has two divisions, which reported the folowing resuts for the most recent year: on 1 Division 2 Income 2,700,000 800,000 Average invested capital 18,000,000, 3,000,000 Ro! 15% 20% 1. Which was the most successful division during the year? 2. What isthe residual income using the imputed intrest rate of 12%, 15% and 188? Waldorf Company has two sources of funds: long-term debt with a market and book value of P10 million issued at an Interest rate of 12%, and equity capital that has a market value of 8 milion (book value of P4 million). Waldorf Company has profit centers In the following locations with the following operating Incomes, total assets, and current liabilities. The cost of equlty capital Is 12%, while the tax rate is 25%. ‘Operatin Current gincome Assets Liabilities St. Lou's P-960,000 P 4,000,000 200,000 Cedar —_P1,200,00 Rapids 9 P-8,000,000 P 600,000 2,040,00 Wichita 10 P12,000,000 P1,200,000 What is the EVA for St. Louls? a. 255,740, . 392,540 b. 327,460 4. P720,000UST AMV COLLEGE OF ACCOUNTANCY