Professional Documents
Culture Documents
PowerPoint Authors:
Jon A. Booker, Ph.D., CPA, CIA
Charles W. Caldwell, D.B.A., CMA
Susan Coomer Galbreath, Ph.D., CPA
McGraw-Hill/Irwin Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.
10-2
Decentralization in Organizations
Advantages of
Top management
Decentralization freed to concentrate
on strategy.
Lower-level managers
gain experience in
decision-making. Decision-making
authority leads to
job satisfaction.
Lower-level decisions
often based on
better information.
Lower level managers
can respond quickly
to customers.
10-3
Decentralization in Organizations
May be a lack of
coordination among
autonomous
Lower-level managers managers.
may make decisions
without seeing the
“big picture.” Disadvantages of
Decentralization
Lower-level manager’s
objectives may not
be those of the May be difficult to
organization. spread innovative ideas
in the organization.
10-4
Responsibility Accounting
Cost, profit,
and investment
centers are all
known as Responsibility
Center
responsibility
centers.
10-5
Cost Center
A segment whose manager has control
over costs, but not over revenues or
investment funds.
10-6
Profit Center
Revenues
A segment whose
Sales
manager has control Interest
over both costs and Other
revenues, Costs
but no control over Mfg. costs
investment funds. Commissions
Salaries
Other
10-7
Investment Center
Corporate Headquarters
A segment whose
manager has
control over costs,
revenues, and
investments in
operating assets.
10-8
Responsibility Centers
Investment
Centers Superior Foods Corporation
Corporate Headquarters
President and CEO
Responsibility Centers
Superior Foods Corporation
Corporate Headquarters
President and CEO
Responsibility Centers
Superior Foods Corporation
Corporate Headquarters
President and CEO
Learning Objective 1
No computer No computer
division means . . . division manager.
10-17
Segment Margin
The segment margin, which is computed by
subtracting the traceable fixed costs of a segment
from its contribution margin, is the best gauge of
the long-run profitability of a segment.
Segment Margin
Time
10-20
Traceable Common
10-21
Activity-Based Costing
Activity-based costing can help identify how costs
shared by more than one segment are traceable to
individual segments.
Assume that three products, 9-inch, 12-inch, and 18-inch pipe, share 10,000
square feet of warehousing space, which is leased at a price of $4 per square foot.
If the 9-inch, 12-inch, and 18-inch pipes occupy 1,000, 4,000, and 5,000 square
feet, respectively, then ABC can be used to trace the warehousing costs to the
three products as shown.
Pipe Products
9-inch 12-inch 18-inch Total
Warehouse sq. ft. 1,000 4,000 5,000 10,000
Lease price per sq. ft. $ 4 $ 4 $ 4 $ 4
Total lease cost $ 4,000 $ 16,000 $ 20,000 $ 40,000
10-22
Computer Television
Division Division
LCD Plasma
Product
Lines
10-29
External Reports
The Financial Accounting Standards Board now requires
that companies in the United States include segmented
financial data in their annual reports.
Omission of Costs
Costs assigned to a segment should include
all costs attributable to that segment from the
company’s entire value chain.
Business Functions
Making Up The
Value Chain
Product Customer
R&D Design Manufacturing Marketing Distribution Service
10-33
Quick Check ✓
Income Statement
Hoagland's
Lakeshore Bar Restaurant
Sales $ 800,000 $ 100,000 $ 700,000
Variable costs 310,000 60,000 250,000
CM 490,000 40,000 450,000
Traceable FC 246,000 26,000 220,000
Segment margin 244,000 $ 14,000 $ 230,000
Common costs 200,000
Profit $ 44,000
Quick Check ✓
Quick Check ✓
Quick Check ✓
Suppose square feet is used as the basis for
allocating the common fixed cost of $200,000.
How much would be allocated to the bar if the
bar occupies 1,000 square feet and the
restaurant 9,000 square feet?
a. $20,000
b. $30,000
c. $40,000
d. $50,000
10-39
Quick Check ✓
Suppose square feet is used as the basis for
allocating the common fixed cost of $200,000.
How much would be allocated to the bar if the
bar occupies 1,000 square feet and the
restaurant 9,000 square feet?
a. $20,000
b. $30,000 The bar would be
c. $40,000 allocated 1/10 of the cost
d. $50,000 or $20,000.
10-40
Quick Check ✓
If Hoagland's allocates its common
costs to the bar and the restaurant,
what would be the reported profit of
each segment?
10-41
Hoagland's
Lakeshore Bar Restaurant
Sales $ 800,000 $ 100,000 $ 700,000
Variable costs 310,000 60,000 250,000
CM 490,000 40,000 450,000
Traceable FC 246,000 26,000 220,000
Segment margin 244,000 14,000 230,000
Common costs 200,000 20,000 180,000
Profit $ 44,000 $ (6,000) $ 50,000
Quick Check ✓
Should the bar be eliminated?
a. Yes
b. No
10-43
Quick Check ✓
Should the bar be eliminated?
a. Yes The profit was $44,000 before
b. No eliminating the bar. If we eliminate
the bar,
Income profit drops
Statement to $30,000!
Hoagland's
Lakeshore Bar Restaurant
Sales $ 700,000 $ 700,000
Variable costs 250,000 250,000
CM 450,000 450,000
Traceable FC 220,000 220,000
Segment margin 230,000 230,000
Common costs 200,000 200,000
Profit $ 30,000 $ 30,000
10-44
Learning Objective 2
Acquisition cost
Less: Accumulated depreciation
Net book value
10-47
Understanding ROI
Net operating income
ROI =
Average operating assets
Net operating income
Margin =
Sales
Turnover = Sales
Average operating assets
Increasing ROI
There are three ways to increase ROI . . .
Reduce
Increase Expenses Reduce
Sales Assets
10-49
ROI = $50,000 ×
$535,000
$535,000 $230,000
Criticisms of ROI
In the absence of the balanced
scorecard, management may
not know how to increase ROI.
Learning Objective 3
Quick Check ✓
Redmond Awnings, a division of Wrap-up Corp.,
has a net operating income of $60,000 and
average operating assets of $300,000. The
required rate of return for the company is 15%.
What is the division’s ROI?
a. 25%
b. 5%
c. 15%
d. 20%
10-61
Quick Check ✓
Redmond Awnings, a division of Wrap-up Corp.,
has a net operating income of $60,000 and
average operating assets of $300,000. The
required rate of return for the company is 15%.
What is the division’s ROI?
a. 25%
b. 5%
ROI = NOI/Average operating assets
c. 15%
d. 20% = $60,000/$300,000 = 20%
10-62
Quick Check ✓
Redmond Awnings, a division of Wrap-up Corp.,
has a net operating income of $60,000 and
average operating assets of $300,000. If the
manager of the division is evaluated based on
ROI, will she want to make an investment of
$100,000 that would generate additional net
operating income of $18,000 per year?
a. Yes
b. No
10-63
Quick Check ✓
Redmond Awnings, a division of Wrap-up Corp.,
has a net operating income of $60,000 and
average operating assets of $300,000. If the
manager of the division is evaluated based on
ROI, will she want to make an investment of
$100,000 that would generate additional net
operating income of $18,000 per year?
a. Yes ROI = $78,000/$400,000 = 19.5%
b. No
This lowers the division’s ROI from
20.0% down to 19.5%.
10-64
Quick Check ✓
The company’s required rate of return is 15%.
Would the company want the manager of the
Redmond Awnings division to make an
investment of $100,000 that would generate
additional net operating income of $18,000 per
year?
a. Yes
b. No
10-65
Quick Check ✓
The company’s required rate of return is 15%.
Would the company want the manager of the
Redmond Awnings division to make an
investment of $100,000 that would generate
additional net operating income of $18,000 per
year?
ROI = $18,000/$100,000 = 18%
a. Yes
b. No The return on the investment
exceeds the minimum required rate
of return.
10-66
Quick Check ✓
Redmond Awnings, a division of Wrap-up Corp.,
has a net operating income of $60,000 and
average operating assets of $300,000. The
required rate of return for the company is 15%.
What is the division’s residual income?
a. $240,000
b. $ 45,000
c. $ 15,000
d. $ 51,000
10-67
Quick Check ✓
Redmond Awnings, a division of Wrap-up Corp.,
has a net operating income of $60,000 and
average operating assets of $300,000. The
required rate of return for the company is 15%.
What is the division’s residual income?
a. $240,000
b. $ 45,000 Net operting income $ 60,000
c. $ 15,000 Required return (15% × $300,000) (45,000)
Residual income $ 15,000
d. $ 51,000
10-68
Quick Check ✓
If the manager of the Redmond Awnings
division is evaluated based on residual
income, will she want to make an investment
of $100,000 that would generate additional
net operating income of $18,000 per year?
a. Yes
b. No
10-69
Quick Check ✓
If the manager of the Redmond Awnings
division is evaluated based on residual
income, will she want to make an investment
of $100,000 that would generate additional
net operating income of $18,000 per year?
a. Yes
Net operting income $ 78,000
b. No
Required return (15% × $400,000) (60,000)
Residual income $ 18,000
Yields an increase of $3,000 in residual income
10-70
Retail Wholesale
Operating assets $ 100,000 $ 1,000,000
Required rate of return × 20% 20%
Minimum required return $ 20,000 $ 200,000
Retail Wholesale
Actual income $ 30,000 $ 220,000
Minimum required return (20,000) (200,000)
Residual income $ 10,000 $ 20,000
10-72
Retail Wholesale
Actual income $ 30,000 $ 220,000
Minimum required return (20,000) (200,000)
Residual income $ 10,000 $ 20,000
10-73
Learning Objective 4
Understand how to
construct and use a
balanced scorecard.
10-74
Financial Customers
Performance
measures
Internal Learning
business and growth
processes
10-75
Internal
Business Number of Time to
options available install option
Processes
Number of Time to
options available install option
Employee skills in
installing options
10-83
Employee skills in
installing options
10-84
Number of Time to
options available install option
Employee skills in
installing options
10-85
End of Chapter 10