Jerald Jay C. Catacutan.

Strategic Cost Management

BSA-2B. Chapter 9: Review Questions

1. What is meant by the term decentralisation.

Decentralisation refers to tire systematic effort to delegate to the lowest levels all authority except that
which can only be exercised at central points.”Decentralisation is referred to as a form of an
organisational structure where there is the delegation of authority by the top management to the
middle and lower levels of management in an organisation. In this type of organisation structure, the
duty of daily operations and minor decision-making capabilities are transferred to the middle and lower
levels which allow top-level management to focus more on major decisions like business expansion,
diversification etc. Delegation refers to the assigning a portion of work and the associated responsibility
by a superior to a subordinate. In simple words, when delegation is expanded on an organisational level,
it is called decentralisation.

2. What benefits are felt to result from decentralization in an organization.

Advantages of decentralized organizations include increased expertise at each division, quicker

decisions, better use of time at top management levels, and increased motivation of division managers.

3. Identify three business practices that hinder proper cost assignment to segments of a company.

These three practices are (i) omission of some costs in the assignment process, (ii) the use of improper
methods for allocating costs among segments, and (iii) assignment of costs to segments that are really
common costs of the entire organization.

4. Explain how the segment margin differs from the contribution margin Which concept is most useful to
the manager? Why?

The contribution margin represents the portion of sales revenue remainingafter deducting variable
expenses. The segment margin represents themargin still remaining after deducting traceable fixed
expenses from thecontribution margin. Generally speaking, the contribution margin is mostuseful as a
planning tool in the short run, when fixed costs don’t change. Thesegment margin is most useful as a
planning tool in the long run, when fixedcosts will be changing, and as a tool for evaluating long-run
segmentperformance. One concept is no more useful to management than the other;the two concepts
simply relate to different planning horizon.

5. What is a segment of an organization? Give several examples of segments.

A segment is any part or activity of an organization about which a managerseeks cost, revenue, or profit
data. Examples of segments includedepartments, operations, sales territories, divisions, product lines,
and soforth.

6.What costs are assigned to a segment under the contribution approach?

Under the contribution approach, costs are assigned to a segment if and onlyif the costs are traceable to
the segment (i.e., could be avoided if thesegment were eliminated). Common costs are not allocated to
segmentsunder the contribution approach.

7.Distinguish between traceable cost and a common cost. Give several examples of each.

A traceable cost of a segment is a cost that arises specifically because of theexistence of that segment. If
the segment were eliminated, the cost woulddisappear. A common cost, by contrast, is a cost that
supports more than onesegment, but is not traceable in whole or in part to any one of the segments.If
the departments of a company are treated as segments, then examples ofthe traceable costs of a
department would include the salary of thedepartment’s supervisor, depreciation of machines used
exclusively by thedepartment, and the costs of supplies used by the department. Examples ofcommon
costs would include the salary of the general counsel of the entirecompany, the lease cost of the
headquarters building, corporate imageadvertising, and periodic depreciation of machines shared by
severaldepartments.