Professional Documents
Culture Documents
15
Segment Reporting, and
Decentralization
Decentralization in Organizations
Benefits of
Decentralization Top
Top management
management
freed
freed to
to concentrate
concentrate
on
on strategy.
strategy.
Lower-level
Lower-level managers
managers
gain
gain experience
experience in
in
decision-making.
decision-making. Decision-making
Decision-making
authority
authority leads
leads to
to
job
job satisfaction.
satisfaction.
Lower-level decision
Lower-level decision
often
often based
based on
on
better
better information.
information.
Improves
Improves ability
ability to
to
evaluate
evaluate managers.
managers.
part or activity of an
organization about A Sales Territory
which a manager
seeks cost,
revenue, or profit
data. A segment A Service Center
can be . . .
Cost Center
A segment whose Co
s
manager has t
investment funds.
A segment whose
manager has
control over costs,
revenues, and
investments in
operating assets.
Cost
Cost Profit
Profit Investment
Investment
Center
Center Center
Center Center
Center
Cost, profit,
and investment
centers are all Responsibility
Responsibility
known as Center
Center
responsibility
centers.
Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 2000
Traceable and Common Costs
Fixed
Costs
Traceable Common
Fixed
Costs Don’t allocate
common costs.
Traceable Common
No computer No computer
division means . . . division manager.
W e b b e r , In c .
C o m p u te r D iv is io n T e le v is io n D iv is io n
Let’s
Let’s look
look more
more closely
closely at
at the
the Television
Television
Division’s
Division’s income
income statement.
statement.
Common
Common costs
costs arise
arise because
because of
of overall
overall
operating
operating activities.
activities. ABC
ABC may
may be
be helpful
helpful
in
in the
the analysis
analysis ofof common
common costs.
costs.
Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 2000
Traceable Costs Can Become Common Costs
R e g u la r B ig S c r e e n
U .S . S a le s F o r e ig n S a le s U .S . S a le s F o r e ig n S a le s
Sales
Territories
Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 2000
Traceable Costs Can Become Common Costs
Income Statement
Television
Division Regular Big Screen
Sales $ 200,000 $ 100,000
Variable costs (95,000) (55,000)
CM 105,000 45,000
Traceable FC (45,000) (35,000)
Product line margin 60,000 10,000
Common costs
Divisional margin
Income Statement
Television
Division Regular Big Screen
Sales $ 300,000 $ 200,000 $ 100,000
Variable costs (150,000) (95,000) (55,000)
CM 150,000 105,000 45,000
Traceable FC (80,000) (45,000) (35,000)
Product line margin 70,000 60,000 10,000
Common costs 10,000
Divisional margin $ 60,000
Fixed
Fixed costs
costs directly
directly traced
traced
to
to the
the Television
Television Division
Division
$80,000
$80,000 ++ $10,000
$10,000 == $90,000
$90,000
Income Statement
Television
Division Regular Big Screen
Sales $ 300,000 $ 200,000 $ 100,000
Variable costs (150,000) (95,000) (55,000)
CM 150,000 105,000 45,000
Traceable FC (80,000) (45,000) (35,000)
Product line margin 70,000 60,000 10,000
Common costs 10,000
Divisional margin $ 60,000
Of the $90,000 cost directly traced to
the Television Division, $45,000 is
traceable to Regular and $35,000
traceable to Big Screen product lines.
Income Statement
Television
Division Regular Big Screen
Sales $ 300,000 $ 200,000 $ 100,000
Variable costs (150,000) (95,000) (55,000)
CM 150,000 105,000 45,000
Traceable FC (80,000) (45,000) (35,000)
Product line margin 70,000 60,000 10,000
Common costs 10,000
Divisional margin $ 60,000
Time
Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 2000
Hindrances to Proper Cost Assignment
The Problems
Omission of some Assignment of costs
costs in the to segments that are
assignment process. really common costs of
the entire organization.
Product Customer
R&D Design Manufacturing Marketing Distribution Service
Arbitrarily dividing
common costs
among segments
Inappropriate
Failure to trace allocation base
costs directly
Cash,
Cash,accounts
accountsreceivable,
receivable,inventory,
inventory,
plant
plantand
andequipment,
equipment,and
andother
other
productive
productiveassets.
assets.
$30,000
ROI = = 15%
$200,000
ROI = 21%
We
We increased
increased ROI
ROI from
from 15%
15% to
to 21%
21%
Operating
Operating assets
assets $$100,000
100,000
Required
Requiredrate
rateof
ofreturn
return ×× 20%
20%
Required
Requiredreturn
return $$ 20,000
20,000
Actual
Actualreturn
return $$ 30,000
30,000
Required
Required return
return (20,000)
(20,000)
Residual
Residualincome
income $$ 10,000
10,000