Reporting Segment and Decentralization
Chapter Twelve
Accounting 2102
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Responsibility Accounting . . . Centralized and Decentralized Operations
Who makes planning and operational decisions?
Centralized Operations
Top management (top down budgeting)
Decentralized Operations Varying levels of mangers and workers (part bud.)
What would necessitate decentralized operations?
Geographic diversity, product diversity, customer diversity
What are the advantages/disadvantages?
Accounting 2102
Frees up top mgmt People in the know make decisions Inc motivation Issue w/ goal congruence
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Responsibility Centers . . . accountability
responsible for . . .
performance evaluation tools . . . BVA (performance report)
example . . .
HR Acct Mktng legal
Cost Center
cost
Revenue Center Profit Center
revenue
Same as above
Travel agent, ins agent Sales dept for the summit agency, dealership
Revenue, cost
Same
Investment Center
Rev, cost, assets
Same, return on Summit agency, investment, residual GM income
Accounting 2102
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Decentralization and Segment Reporting
segment . . . any part or activity of an organization about which a manager seeks cost, revenue, or profit data
characteristics of segmented reporting (performance report) contribution income format traceable fixed costs should be separated from common fixed costs to enable the calculation of a segment margin the traceable fixed costs of one segment may be a common fixed cost of another segment
common costs should not be arbitrarily allocated to segments based on the rationale that "someone has to cover the common costs" . . .
may make a profitable business segment appear to be unprofitable
forces managers to be held accountable for costs they cannot control
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Accounting 2102
Sporting Heaven
Sporting Heaven is a multi-store retailer specializing in sporting equipment. The following information was available about one of its Georgia retail outlets:
Net Sales-C $220,000 $80,000 Cost of Goods Sold-C
Wages of Hourly Personnel-C Property Tax and Depreciation-N, T
Miscellaneous Fixed Operating Expenses-C Number of Employees
$32,000 $16,000
$1,000 ($3,120) 8
Number of Local Advertisements
($8,040) 12
The following indirect costs were incurred by centralized service departments:
General Administration Personnel and Payroll Marketing
Accounting 2102
$83,000 $49,000 $67,000
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Sporting Heaven
Store managers can control the services used from Personnel and Payroll and Marketing; however, they can not control services provided by General Administration. Personnel and Payroll services are allocated based on number of employees (100 company wide) while advertising is based on number of local advertisements placed (100 company wide). Generate a performance report for the Dacula store.
SR (Control) (COGS) (hrly) (pers./ payroll) (mkting) (misc fixed op)
PM control by mgr (prop tax/ dep) Segment PM
$220,000 $80,000 $32,000 $3,920 $8,040 $1,000
$95,000 $16,000 $79,040
Accounting 2102
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Investment Center
(responsibility accounting)
responsible for . . . profit (revenue expense) efficient investment of assets
examples . . . GMC division of General Motors The Summit Agency, Inc. performance measures . . . 1. Return on Investment (ROI) 2. Residual Income (RI)
Accounting 2102
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first performance measure . . .
Return on Investment
ROI = income
controllable operating income
invested capital
average operating assets
tells you how much profit is earned on every $1 invested
two potential underlying reasons for ROI 1. profitability of sales . . . profit/sales margin 2. efficiency of sales generation . . . capital/investment turnover ratio
Accounting 2102
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Expanded ROI Formula
ROI = income invested capital ROI = (income sales) x (sales invested capital) ROI = sales margin x investment turnover ratio
How can a division increase ROI? 1. increase sales revenue (change price or volume) 2. decrease costs (cost containment) 3. eliminate nonproductive assets (excess inventory, old receivables)
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Chocolate is My Weakness, Inc . . . ROI example
Chocolate is My Weakness, Inc., a manufacturer of candy has two divisions: Plain and Peanut. The following data relate to operations for the period just Plain Peanut ended: Income $30,000 $20,000
Sales Revenue
$150,000
$100,000
Average Invested Capital $50,000 $12,000 (Net Assets) Compute Sales Margin for each division: for each $1 of sales . . . Plain = $30,000 $150,000 = 20% $0.20 profit Peanut = $20,000 $100,000 = 20% Compute Investment Turnover Ratio for each division: Peanut is using its invested capital more Plain = $150,000 $50,000 = 3 efficiently . . . for every $1 of capital invested, Peanut = $100,000 $12,000 = 8.3 $8.33 of sales revenue was generated
Compute ROI for each division.
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second performance measure . . .
Residual Income
RI = income minimal acceptable income
invested capital x minimum acceptable rate of return
factors in the company's cost of raising capital dollar amount . . . not a percentage should not be used to compare different size divisions facilitates goal congruence if used as a performance measure
Accounting 2102
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Chocolate is My Weakness, Inc . . . RI example
Chocolate is My Weakness, Inc., a manufacturer of candy has two divisions: Plain and Peanut. The following data relate to operations for the period just ended: Plain Peanut Income Sales Revenue Average Invested Capital $30,000 $150,000 $50,000 $20,000 $100,000 $12,000
Calculate each division's RI assuming a minimum required rate of return of 15%.
Plain = $30,000 ($50,000 x 15%) = $22,500 Peanut = $20,000 ($12,000 x 15%) = $18,200
RI is the division's profit that remains after subtracting an imputed interest charge
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ROI and RI as performance measures . . . potential employee behavior
A manager of an investment center is evaluated based on ROI. His division's ROI is 30%. The company's minimum acceptable rate of return is 20%. A potential investment opportunity has arisen, which would require $100,000 in capital and provide $25,000 of income. Would the manager seize the investment opportunity? * No . . . ROI for the investment is less than his division's . . . $25,000 $100,000 = 25% (note that the ROI is greater than the company's minimum acceptable rate of return)
What if the manager is evaluated based on RI? Would the manager seize the investment opportunity? * Yes . . . RI is positive . . . $25,000 ($100,000 x 20%) = $5,000 . . . So the manager would act in the best interest of the company
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