Documente Academic
Documente Profesional
Documente Cultură
Gail B. Wright
Professor Emeritus of Accounting
Bryant University
MANAGEMENT
ACCOUNTING
8th EDITION
BY
HANSEN & MOWEN
10 SEGMENTED REPORTING
1
LEARNING
OBJECTIVES
LEARNING
OBJECTIVES
LEARNING GOALS
LEARNING
LEARNING OBJECTIVES
OBJECTIVES
1. Explain how & why firms choose to
decentralize.
2. Explain the difference between absorption
& variable costing, & prepare segmented
income statements.
3. Compute & explain return on investment
(ROI).
Continued
3
LEARNING
LEARNING OBJECTIVES
OBJECTIVES
4. Compute & explain residual income &
economic value added (EVA).
5. Explain the role of transfer pricing in a
decentralized firm.
LEARNING
LEARNING OBJECTIVE
OBJECTIVE
LO 1
What is a responsibility
accounting system?
A responsibility accounting
system measures the results of
responsibility centers according to
information managers need to
operate their centers.
10
LO 1
LO 1
CENTRALIZATION &
DECENTRALIZATION
EXHIBIT 10-1
12
LO 1
REASONS FOR
DECENTRALIZATION
Firms decide to decentralize:
For ease of gathering, using local information
To focus central management
To train & motivate segment managers,
To enhance competition & expose segments to
market forces
13
LO 1
DIVISIONS IN DECENTRALIZED
FIRM
Decentralization achieved by creating divisions
by
Type of goods & services
Geographic lines
Type of responsibility given to divisional manager
14
LO 1
RESPONSIBILITY
RESPONSIBILITY CENTER:
CENTER:
Definition
Definition
15
LO 1
RESPONSIBILITY CENTERS
Major types of responsibility centers are:
Cost centers
Manager responsible for cost only
Revenue center
Manager responsible for sales only
Profit center
Manager responsible for sales & costs
Investment center
Manager responsible for sales, costs, & capital
investment
16
LEARNING
LEARNING OBJECTIVE
OBJECTIVE
17
LO 2
LO 2
INVENTORY
INVENTORY VALUATION:
VALUATION:
Background
Background
0
10,000
8,000
$ 50
Direct labor
100
Variable overhead
50
Fixed costs
Fixed overhead per unit produced
Fixed selling & administrative
25
100,000
19
LO 2
ABSORPTION COSTING
Direct materials
Direct labor
50
100
Variable overhead
50
25
$ 225
LO 2
VARIABLE COSTING
Direct materials
Direct labor
Variable overhead
Unit product cost
50
100
50
$ 200
LO 2
COMPARATIVE INCOME
STATEMENTS
EXHIBIT 10-6
22
LO 2
ABSORPTION INCOME
STATEMENT
Sales ($300 x 8,000)
$ 2,400,000
1,800,000
Gross margin
$ 600,000
100,000
$ 500,000
CGS =
8,000 x $ 225 = $ 1,800,000
23
LO 2
2,400,000
1,600,000
Contribution margin
800,000
350,000
Operating income
450,000
LO 2
25
LO 2
EXPLANATION
The
The difference
difference between
between variable
variable costing
costing
&
& absorption
absorption costing
costing year
year to
to year
year is
is
equal
equal to
to the
the change
change in
in fixed
fixed overhead.
overhead.
Under
Under absorption
absorption costing,
costing, fixed
fixed
overhead
overhead is
is assigned
assigned to
to inventory
inventory
produced.
produced. Under
Under variable
variable costing,
costing,
fixed
fixed overhead
overhead is
is aa period
period expense.
expense.
26
LO 2
27
LO 2
SEGMENT:
SEGMENT: Definition
Definition
Is a subunit of a company of
sufficient importance to warrant
performance reports.
28
LO 2
DIRECT
DIRECT FIXED
FIXED EXPENSES:
EXPENSES:
Definition
Definition
29
LO 2
COMMON
COMMON FIXED
FIXED EXPENSES:
EXPENSES:
Definition
Definition
30
LO 2
COMPARATIVE INCOME
STATEMENTS
Segment margin is
contribution to firms
common fixed costs.
EXHIBIT 10-11
31
LEARNING
LEARNING OBJECTIVE
OBJECTIVE
32
LO 3
FORMULA: ROI
ROI relates operating profits to assets
employed.
Operating Income
Average Operating Assets
33
LO 3
LO 3
ALPHA
ALPHA CO.
CO. &
& BETA
BETA CO.
CO.
Background
Background
Alpha
Beta
Operating income
$ 100,000 $ 200,000
Operating assets
$ 500,000 $2,000,000
35
LO 3
COMPARING ROI
ROI: ALPHA
= Op. Income / Ave. Op. Assets
= $100,000 / $500,000 = .20
ROI: BETA
= Op. Income / Ave. Op. Assets
= $200,000 / $2,000,000 = .10
36
LO 3
37
LO 3
What is margin?
What is turnover?
LO 3
CELIMAR
CELIMAR CO.
CO. Background
Background
Sales
$ 480,000
Operating income
$ 48,000
Operating assets
$ 300,000
39
LO 3
40
LO 3
EXPLANATION: ROI
The
The net
net return
return on
on investments
investments is
is driven
driven
by
by 22 independent
independent items:
items: the
the ability
ability to
to
squeeze
squeeze profit
profit from
from sales
sales and
and the
the
ability
ability to
to squeeze
squeeze sales
sales from
from invested
invested
assets.
assets.
41
LO 3
ADVANTAGES OF ROI
Encourages managers to focus on
Relationship among sales, expenses (& possibility
investment if this is investment center)
Cost efficiency
Operating asset efficiency
42
LO 3
With Increased
Advertising
$ 2,000,000
$ 2,200,000
1,850,000
2,040,000
Less expenses
Operating income
Operating assets
$ 1,000,000
$ 1,050,000
15%
15.24%
ROI
150,000
160,000
The current ROI is the hurdle rate used to make decisions about changes.
43
LO 3
DISADVANTAGES OF ROI
Can product a narrow focus on divisional
profitability at expense of profitability for
overall firm
Encourages managers to focus on short run at
expense of long run
44
LO 3
ALTERNATIVES: ROI
Only
Project I
Only
Project II
Both
Projects
Neither
Project
$9,440,000 $ 7,500,000
Op. income
$ 8,800,000
$ 8,140,000
Op. assets
$60,000,000
ROI
14.67%
15.07%
14.75%
15.00%
45
LEARNING
LEARNING OBJECTIVE
OBJECTIVE
46
LO 4
RESIDUAL INCOME
Residual income is the difference between
operating income and minimum dollar return
on sales.
Residual Income
= Operating income
(Min. rate of return x Ave. Operating Assets)
= $48,000 (0.12 x $300,000)
= $12,000
47
LO 4
Only
Project I
Only
Project II
Both
Projects
Neither
Project
Op. income
$ 8,800
$ 8,140
$9,440
$ 7,500
Op. assets
$60,000
$54,000
$64,000
$50,000
Min. return*
6,000
5,400
6,400
5,000
Residual Inc.
$2,800
$ 2,740
$ 3,040
$ 2,500
* 10%
48
LO 4
ADVANTAGES &
DISADVANTAGES: Residual Income
Advantage: Gives another view of project
profitability
Disadvantages
Can encourage short run orientation
Direct comparisons are difficult
49
LO 4
50
LEARNING
LEARNING OBJECTIVE
OBJECTIVE
51
LO 5
TRANSFER
TRANSFER PRICING:
PRICING: Definition
Definition
52
LO 5
LO 5
Cost-Based price
When there is not good outside price
Negotiated price
Useful with there are market imperfections
54
CHAPTER 10
THE
THE END
END
55