040710_v2003 - CH 11 Take-aways Managers should be held...

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Kattelus - Spring 2010 1 CH 11 Take-aways Managers should be held accountable for what they can control. So: define their segment carefully calculate a segment margin by tracing any fixed costs attributable to that segment Investment center managers may be evaluated using ROI and Residual Income
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3 primary types of responsibility centers Cost Centers include service departments such as accounting, general administration, legal, and personnel, as well as manufacturing facilities. Profit Center managers are often evaluated by comparing actual profit to targeted or budgeted profit. Investment Center managers are usually evaluated using return on investment (ROI)
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Other financial reporting issues FASB requires that U.S. companies include segmented financial data in their annual reports Companies must report segmented results to shareholders using the same methods that are used for internal segmented reports The contribution approach doesn’t comply with GAAP The absorption approach hinders internal decision making because it does not distinguish between fixed and variable costs or common and traceable costs
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Demo: Contribution Margin Ratio with Two Divisions A company has two divisions, Red and Blue. The overall company contribution margin ratio is 30%, with sales in the two divisions totaling $600,000. If variable expenses are $300,000 in Red, and if Red’s contribution margin ratio is 20%, then sales in Blue is: $225,000 Kattelus - Spring 2010 4
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Demo: Contribution Margin Red Division Blue Division Total Sales Less: Variable Expenses Contribution Margin Contribution Margin Ratio Kattelus - Spring 2010 5
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Demo: Traceable Fixed Costs with Two Divisions/Products A company has two divisions: AA and BB. AA Division’s divisional segment margin is $255,000 and BB Division’s divisional segment margin is $59,800. The total amount of common fixed expenses not traceable to the individual divisions is Kattelus - Spring 2010 6 AA BB Total Segment margin $255,000 $59,800 $314,80 0 Less: Common fixed costs (not traceable) 163,700 Net operating income 151,100
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040710_v2003 - CH 11 Take-aways Managers should be held...

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