Chapter%2011%20Lecture%20Notes0.Students - Acct 2200...

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Acct 2200 Chapter 11 Lecture Notes (2012) Segment Reporting, Decentralization and the Balanced Scorecard Learning Objectives: 1. Prepare a segmented income statement using the contribution format, and explain the difference between traceable fixed costs and common fixed costs. 2. Compute return on investment (ROI) and show how changes in sales, expenses, and assets affect ROI. 3. Compute residual income and understand its strengths and weaknesses. 4. Understand how to construct and use a balanced scorecard. Part I. Responsibility Accounting In a decentralized organization , decision-making authority is spread throughout the organization rather than being confined to a few top executives. Decentralized organizations need responsibility accounting systems that link lower-level managers' decision-making authority with accountability for the outcomes of those decisions. The term responsibility center is used for any part of an organization whose manager has control over and is accountable for cost, profit, or investments. The three primary types of responsibility centers are cost centers, profit centers, and investment centers: 1. cost centers a. The manager of a cost center has control over costs, but not over revenue or the use of investment funds. b. Managers of cost centers are expected to minimize costs while providing the level of products and services demanded by other parts of the organization. Standard cost variances and flexible budget variances, are often used to evaluate cost center performance. 2. profit center s a. The manager of a profit center has control over both costs and revenue, but not over the use of investment funds . b. Profit center managers are often evaluated by comparing actual profit to targeted or budgeted profit. 3. investment center s a. The manager of an investment center has control over cost, revenue, and investments in operating assets. b. Investment center managers are usually evaluated using return on investment (ROI) or residual income measures. Part II. Segment Reporting Effective decentralization requires segmented reporting. A segment is a part or activity of an organization about which managers would like cost, revenue, or profit data. 1
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A segment report usually has two kinds of fixed costs—traceable and common. Only the traceable fixed costs are charged to particular segments. If a cost is not traceable to a segment, then it is not assigned to the segment. A traceable fixed cost of a segment is a fixed cost that is incurred because of the existence of the segment—if the segment had never existed, the fixed cost would not have been incurred; and if the segment were eliminated, the fixed cost would disappear. A common fixed cost is a fixed cost that supports the operations of more than one segment, but is not traceable in whole or in part to any one segment. Even if a segment were entirely eliminated, there would be no change in a true common fixed cost.
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This note was uploaded on 01/23/2012 for the course ACCT 2200 taught by Professor Rose during the Spring '08 term at Kennesaw.

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Chapter%2011%20Lecture%20Notes0.Students - Acct 2200...

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