11
Evaluating Chapter Performance
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Learning Objective 1
Describe centralized and decentralized management styles.
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Centralized Management
Top management makes most of the decisions.
The most experienced managers are making the important decisions.
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Centralized Management
Top managers spend their time making routine decisions. Top managers may not be familiar with the routine aspects of the business. Little opportunity for lower-level employees to gain experience.
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Decentralized Management
Lower-level managers are responsible for management decisions that relate to their segment of the business.
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Decentralized Management
Spreads the decision-making responsibilities. Provides an opportunity for lower-level managers to sharpen their decision-making skills.
Decisions are made by managers most familiar with the problems. Allows top management to focus on strategic decisions.
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Decentralized Management
Decisions may not entirely reflect the view of top managers.
Decisions are made by less experienced managers.
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Learning Objective 2
Describe the different types of business segments and the problems associated with determining segments costs.
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Business Segments
A business segment represents a part of a company managed by a particular individual...
or a part of a company about which separate information is needed.
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Segment Reports
Managers need information that relates to their business segment.
Reports that provide information pertaining to a particular business segment are called segment reports.
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Learning Objective 3
Prepare a segment income statement.
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The Segment Income Statement
An income statement prepared for one segment of a business is called a segment income statement. Contribution income format
Functional format
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The Segment Income Statement
QUINTANA COMPANY MIAMI OFFICE Segment Income Statement For the Year Ended December 31, 2004
Sales Variable cost Contribution margin Fixed cost for Miami office Segment margin $1,200,000 800,000 $ 400,000 300,000 $ 100,000
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Identifying Segment Costs
By definition, variable costs are "caused" by some sort of activity or volume.
If that activity or volume is related to a particular segment, then so is the variable cost.
Fixed costs are more difficult to trace.
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Identifying Segment Costs
Fixed costs that arise to support a single segment are called direct (or traceable) fixed costs. Fixed costs that are related to more than one segment are common (or indirect) fixed costs.
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Flandro Feed Stores
Segment Income Statement For the Year Ended December 31, 2005 Company Total Sales $500,000 Variable cost 332,950 Contribution margin $167,050 Direct fixed cost 75,000 Segment margin $ 92,050 Common fixed cost 60,000 Net income $ 32,050
1$105,000
North Store $105,000 73,750 $ 31,250 20,000 $ 11,250 12,6001 $ (1,350)
South Store $225,000 141,000 $ 84,000 32,000 $ 52,000 27,0002 $ 25,000
Central Store $170,000 118,200 $ 51,800 23,000 $ 28,800 20,4003 $ 8,400
$500,000 = 21% $60,000 = $12,600 2$225,000 $500,000 = 45% $60,000 = $27,000 3$170,000 $500,000 = 34% $60,000 = $20,400
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Flandro Feed Stores With North Store Eliminated
Segment Income Statement For the Year Ended December 31, 2005 Company Total Sales $395,000 Variable cost 259,200 Contribution margin $138,800 Direct fixed cost 55,000 Segment margin $ 80,800 Common fixed cost 60,000 Net income $ 20,800
2$225,000
North Store
South Store $225,000 141,000 $ 84,000 32,000 $ 52,000 34,2002 $ 17,800
Central Store $170,000 118,200 $ 51,800 23,000 $ 28,800 25,8003 $ 3,000
$395,000 = 57% $60,000 = $34,200 3$170,000 $395,000 = 43% $60,000 = $25,800
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Flandro Feed Stores Without Allocation of Common Fixed Cost
Segment Income Statement For the Year Ended December 31, 2005 Company North Total Store Sales $500,000 $105,000 Variable cost 332,950 73,750 Contribution margin $167,050 $ 31,250 Direct fixed cost 75,000 20,000 Segment margin $ 92,050 $ 11,250 Common fixed cost 60,000 Net income $ 32,050 South Store $225,000 141,000 $ 84,000 32,000 $ 52,000 Central Store $170,000 118,200 $ 51,800 23,000 $ 28,800
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Allocating Service Cost
Service Department department Possible allocation basis Personnel dept. Number of employees Number of employees Cafeteria Number of meals served Finance dept. Capital invested Computer Computer mainframe time operations No. of personal computers Sq. ft. of building occupied Maintenance Hours of maintenance
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Activity-Based Allocation
This cost allocation method tends to be more fair and accurate. Managers will work to reduce the allocation base.
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Evaluating Business Segments
Revenue centers
Cost centers
Profit centers
Investment centers
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Learning Objective 4
Describe and calculate the return on investment.
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Return on Investment
Return on investment (ROI) is the percentage return generated by an investment in a business or business segment.
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Return on Investment Lisa Company
Eastern Division $896,750 income $10,550,000 investment = ROI 8.50%
Western Division $857,500 income $9,800,000 investment = ROI 8.75%
The company's required ROI is 8%.
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Effect of New Investments
An investment opportunity for the Eastern Division promises additional income of $123,750 and requires an additional investment of $1,500,000.
What is the ROI?
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Effect of New Investments
$123,750 New income $1,500,000 Investment = ROI 8.25%
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Effect of New Investments
Eastern Division Without new investment $896,750 Income $10,550,000 Investment = ROI 8.50%
Eastern Division With new investment $1,020,500 Income $12,050,000 Investment = ROI 8.47%
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Learning Objective 5
Describe and calculate residual income and economic value added (EVA).
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Residual Income and (EVA)
Residual income is a technique that focuses on the amount by which a segment's actual income exceeds the income needed to meet the company's required rate of return.
(EVA) is similar to residual income adjusted.
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Calculating Residual Income
The company's required ROI is 8%. Eastern Division Actual income $896,750 Less: Required income ($10,550,000 8%) 844,000 Residual income $ 52,750
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Calculating Residual Income
The company's required ROI is 8%. Western Division Actual income $857,500 Less: Required income ($9,800,000 8%) 784,000 Residual income $ 73,500
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Calculating Residual Income
Residual income with new investment opportunity: Eastern Division Actual income $1,020,000 Less: Required income ($12,050,000 8%) 964,000 Residual income $ 56,000
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Calculating Residual Income
Residual income without new investment opportunity: $52,750
Residual income with new investment opportunity: $56,000
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Learning Objective 6
Describe the balanced scorecard and the importance of nonfinancial performance measures.
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Four Balanced Scorecard Perspectives
Financial perspective Internal processes perspective
Customer perspective
Strategy
Innovation perspective
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Four Balanced Scorecard Perspectives
Operating income ROI EVA Sales growth Cost reductions
Financial
To succeed financially
Customer
To achieve our vision of how we should appear to our customers
No. of new customers Customer retention Market share Time to fill orders Customer satisfaction
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Accounting 212
Four Balanced Scorecard Perspectives
To excel at having superior business processes to satisfy our shareholders and customers
To sustain our ability to change and improve.
Internal
Process quality measures Lead time Defect rates Scrap measures
Innovation and learning
Employee retention Employee productivity Training Reskilling Suggestion system
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Accounting 212
Just-in-Time Philosophy
The (JIT) philosophy involves eliminating all unnecessary inventory and limiting the use of company resources.
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Just-in-Time Philosophy
Zero defects
Setup time
Throughput time
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Just-in-Time Philosophy
Lead time
Unscheduled downtime
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Commitment to JIT
Managers who are committed to the JIT philosophy tend to think about improving efficiency on a regular basis. They need the help of committed employees to pull it off. Total company commitment is necessary for the JIT approach to succeed.
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End of Chapter 11
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