ac102_ch10 - Revised Summer 2010 CHAPTER 10 SEGMENT...

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Revised Summer 2010 Page 1 of 20 CHAPTER 10 SEGMENT REPORTING, DECENTRALIZATION AND THE BALANCED SCORECARD Key Terms and Concepts to Know Organizations: Centralized and decentralized organizations Business segments include cost centers, profit centers and investment centers. Decentralization: The delegation of decision-making to lower levels of management. It is not possible for all decisions to be made by top management, especially in large and medium sized organizations. Responsibility accounting systems link decision-making authority with accountability for the outcomes of those decisions. Large and medium sized organizations are often divided into three types of responsibility centers: cost centers, profit centers and/or investment centers: o Cost Centers which may be evaluated through variance analysis o Profit Centers which may be evaluated by comparing actual income to budgeted income o Investment Centers which may be evaluated using Return on Investment or Residual Income Fixed Costs: Traceable fixed costs are incurred for the benefit of one business segment and are controllable by the segment Common fixed costs are incurred for the benefit of more than one segment and are not traceable to or controllable by any one segment. There are numerous approaches to the allocation of common fixed expenses to business segments Problems caused by arbitrarily dividing common costs among segments Segment Performance Evaluation: Segment Income Statement
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Revised Summer 2010 Page 2 of 20 Return on Investment (ROI) method Residual Income method Key Topics to Know Evaluation of Management Performance Managers of the cost centers, profit centers and/or investment centers are held responsible for the results of their particular segment. This is referred to as responsibility accounting. Each segment may prepare a Segment Income Statement income statement which reports the revenue, variable expenses, contribution margin and traceable fixed expenses controllable by segment management. The highlight of the segment income statement is the Segment Margin, computed as segment contribution margin less the seg ment’s traceable fixed costs. It represents the segment’s income after all the traceable fixed costs have been covered. Some companies then deduct the segment’s share of common or allocated fixed expenses to calculate the segment’s operating income. In addition to the segment income statement, segment performance may be evaluated using either Return on Investment or Residual Income . Return on Investment ROI measures the segments ability to utilize its operating assets to generate income. ROI focuses on how efficiently the assets are used since it expressed as a percent of the assets used. The ability to generate income by utilizing operating assets varies widely by industry and by company within an industry. Return on Investment (ROI) has three interrelated formulas:
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ac102_ch10 - Revised Summer 2010 CHAPTER 10 SEGMENT...

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