1 / 73

Segment Reporting

Chapter 12. Segment Reporting. LEARNING OBJECTIVES. After studying this chapter, you should be able to:. 1. Differentiate among cost centres, profit centres, and investment centres, and explain how performance is measured in each.

candice-cross
Download Presentation

Segment Reporting

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Chapter12 Segment Reporting

  2. LEARNING OBJECTIVES After studying this chapter, you should be able to: 1. Differentiate among cost centres, profit centres, and investment centres, and explain how performance is measured in each. 2. Prepare a segmented income statement using the contribution format, and explain the difference between traceable fixed costs and common fixed costs. 3. Identify three business practices that hinder proper cost assignment. 4. Analyze variances from revenue targets.

  3. LEARNING OBJECTIVES After studying this chapter, you should be able to: 5. Analyze marketing expenses using cost drivers. 6. Compute the return on investment (ROI). 7. Show how changes in sales, expenses, and assets affect an organization’s ROI. 8. Compute residual income, and understand the strengths and weaknesses of this method of measuring performance. 9. (Appendix 12A) Determinethe range, if any, within which a negotiated transfer price should fall.

  4. Decentralization in Organizations Benefits of Decentralization Top management freed to concentrate on strategy. Lower-level managers gain experience in decision-making. Decision-making authority leads to job satisfaction. Lower-level decision often based on better information. Improves ability to evaluate managers.

  5. Decentralization in Organizations May be a lack of coordination among autonomous managers. Lower-level managers may make decisions without seeing the “big picture.” Disadvantages of Decentralization Lower-level manager’s objectives may not be those of the organization. May be difficult to spread innovative ideas in the organization.

  6. Decentralization and Segment Reporting An Individual Store A segment is any part or activity of an organization about which a manager seeks cost, revenue, or profit data. A segment can be . . . Canadian Tire A Sales Territory A Service Centre

  7. Cost, Profit, and Investment Centres Cost Centre A segment whose manager has control over costs, but not over revenues or investment funds. Cost Cost Cost

  8. Cost, Profit, and Investment Centres Profit Centre A segment whose manager has control over bothcosts and revenues, but no control over investment funds. Revenues Sales Interest Other Costs Mfg. costs Commissions Salaries Other

  9. Cost, Profit, and Investment Centres Investment Centre A segment whose manager has control over costs, revenues, and investments in operating assets. Corporate Headquarters

  10. Cost, Profit, and Investment Centres Cost Centre Profit Centre Investment Centre Cost, profit, and investment centres are all known as responsibility centres. Responsibility Centre

  11. Traceable and Common Fixed Costs Fixed Costs Traceable Common Costs arise because of the existence of a particular segment. Costs arise because of overall operating activities.

  12. Traceable and Common Fixed Costs Fixed Costs Don’t allocate common costs. Traceable Common Costs arise because of the existence of a particular segment. Costs arise because of overall operating activities.

  13. Identifying Traceable Fixed Costs Traceable fixed costswould disappear over time if the segment itself disappeared. No computer division means . . . No computer division manager.

  14. Identifying Common Fixed Costs Common costsarise because of overall operation of the company and are not due to the existence of a particular segment. No computer division but . . . We still have a company president.

  15. Levels of Segmented Statements Webber, Inc. has two divisions. Let’s look more closely at the Television Division’s income statement.

  16. Levels of Segmented Statements Our approach to segment reporting uses the contribution format. Cost of goods sold consists of variable manufacturing costs. Fixed and variable costs are listed in separate sections.

  17. Levels of Segmented Statements Our approach to segment reporting uses the contribution format. Segment margin is Television’s contribution to overall operations.

  18. Levels of Segmented Statements Let’s see how the Television Division fits into Webber, Inc.

  19. Levels of Segmented Statements Segment margin has now become division margin. Let’s add the Computer Division’s numbers.

  20. Levels of Segmented Statements

  21. Levels of Segmented Statements Common costs arise because of overall operating activities. ABC may be helpfulin the analysis of common costs.

  22. Traceable Costs Can Become Common Costs Fixed costs that are traceable on one segmented statement can become common if the company is divided into smaller segments. Let’s see how this works!

  23. Traceable Costs Can Become Common Costs Webber’s Television Division Product Lines Sales Territories

  24. Traceable Costs Can Become Common Costs We obtained the following information from the Regular and Big Screen segments.

  25. Traceable Costs Can Become Common Costs Fixed costs directly traced to the Television Division $80,000 + $10,000 = $90,000

  26. Traceable Costs Can Become Common Costs Of the $90,000 cost directly traced to the Television Division, $45,000 is traceable to Regular and $35,000 traceable to Big Screen product lines.

  27. Traceable Costs Can Become Common Costs The remaining $10,000 cannot be traced to either the Regular or Big Screen product lines.

  28. Segment Margin The segment margin is the best gauge of the long-run profitability of a segment. Profits Time

  29. Hindrances to Proper Cost Assignment Three Problems Omission of some costs in the assignment process. Assignment to segments of costs that are really common costs of the entire organization. Use of inappropriate methods for allocating costs among segments.

  30. Product Customer R&D Design Manufacturing Marketing Distribution Service Omission of Costs Costs assigned to a segment should include all costs attributable to that segment from the company’s entire value chain. Life cycle costing focuses on all costs along the value chain that will be generated throughout the entire life of the product. Business Functions Making Up The Value Chain

  31. Segment 3 Segment 1 Segment 4 Segment 2 Inappropriate Methods of Allocating Costs Among Segments Arbitrarily dividing common costs among segments Inappropriate allocation base Failure to trace costs directly

  32. Revenue Variance Analysis Consider the following example for CardCo: BudgetActual Sales in units Deluxe cards 14,000 17,000 Standard cards 6,000 5,000 Price per unit Deluxe cards $18 $16 Standard cards $ 9 $10 Market volume Deluxe cards 75,000 85,000 Standard cards 95,000 90,000 Variable cost per unit Deluxe cards $ 8 $ 8 Standard cards $ 3 $ 3

  33. CardCo Actual and Budgeted Results Revenue Variance Analysis Actual results are based on the actual quantity sold multiplied by the actual selling price or variable cost

  34. CardCo Actual and Budgeted Results Revenue Variance Analysis Flexible budget results are based on the actual quantity sold multiplied by the budgetedselling price or variable cost

  35. CardCo Actual and Budgeted Results Revenue Variance Analysis Master budget results are based on the budgeted quantity sold multiplied by the budgetedselling price or variable cost

  36. CardCo Actual and Budgeted Results Revenue Variance Analysis Sales Price Variance $29,000 U

  37. CardCo Actual and Budgeted Results Revenue Variance Analysis $29,000U or Sales Price Variance=(Actual - Budgeted price)x Actual sales volume Deluxe =($16-$18) x 17,000 units = $34,000 U Standard =($10-$9) x 5,000 units = $ 5,000 F Total sales price variance = $29,000 U

  38. CardCo Actual and Budgeted Results Revenue Variance Analysis Sales Volume Variance $24,000 F

  39. Revenue Variance Analysis CardCo Actual and Budgeted Results $24,000F or Sales Volume Variance=(Actual - Budgeted quantity) x Budgeted CM Deluxe =(17,000-14,000) x ($18-$8) units = $30,000 F Standard =(5,000-6,000) x ($9-$3) = $ 6,000 U Total sales volume variance = $24,000 F

  40. } { Actual market share Expected market share - Revenue Variance Analysis • The Sales Volume Variance can further be broken down into the: • Market Volume Variance = • Market Share Variance = { } Actual market volume Budget market volume Expected market share % Budgeted CM per unit - x x [ ] Actual sales quantity Budgeted CM per unit - x

  41. Revenue Variance Analysis • For CardCo, the Sales Volume Variance of $24,000 F breakdown further as follows: • Market Volume Variance Deluxe=(85,000-75,000) x (14,000/75,000) x (18-8) =18,667 F Standard=(90,000-95,000) x (6,000/95,000) x (9-3) = 1,895 U Total Market Volume Variance (1)16,772 F • Market Share Variance Deluxe=[17,000-(85,000 x 14,000/75,000)] x (18-8) =11,333 F Standard=[5,000-(90,000 x 6,000/95,000)] x (9-3) = 4,105 U Total Market Share Variance (2)7,228 F Sales Volume Variance = (1)+ (2)= 24,000 F

  42. { } Actual sales quantity at expected sales mix Actual sales quantity - Budgeted CM per unit x } { Actual sales quantity at expected sales mix Anticipated sales quantity - Budgeted CM per unit x Revenue Variance Analysis • The Sales Volume Variance can also be broken down into the: • Sales Mix Variance = • Sales Quantity Variance =

  43. Revenue Variance Analysis • For CardCo, the Sales Volume Variance of $24,000F is made up of: • Sales Mix Variance Deluxe=[17,000-(22,000 x14/20)] x (18-8) =16,000 F Standard=[(5,000-22,000 x 6/20)] x (9-3) = 9,600 U Total Sales Mix Variance (1)6,400 F • Sales Quantity Variance Deluxe=[(22,000 x 14/20)-14,000] x (18-8) =14,000 F Standard=[(22,000 x 6/20)-6,000] x (9-3) = 3,600 F Total Sales Quantity Variance (2)17,600F Sales Volume Variance = (1)+ (2)= 24,000F

  44. Costs factors to consider in marketing strategy: Transport Warehousing Marketing Strategy Advertising Selling Credit

  45. More Discretionary Order Getting and Order Filling

  46. Net operating income Average operating assets ROI = Return on Investment (ROI) Formula Income before interest and taxes (EBIT) Cash, accounts receivable, inventory, plant and equipment, and other productive assets.

  47. $30,000 $200,000 =15% ROI = Return on Investment (ROI) Formula Regal Company reports the following: Net operating income $ 30,000 Average operating assets $ 200,000 Sales $ 500,000

  48. Controlling the Rate of Return Three ways to improve ROI . . . • Reduce • Expenses • Reduce • Assets • Increase • Sales

  49. Controlling the Rate of Return • Regal’s manager was able to increase sales to $600,000, which increased net operating income to $42,000. • There was no change in the average operating assets of the segment. Let’s calculate the new ROI.

  50. Return on Investment (ROI) Formula We can modify our original formula slightly: Margin Turnover × Net operating income Sales Sales Average operating assets ROI = × $42,000 $600,000 $600,000 $200,000 ROI = × ROI = 21% We increased ROI from 15% to 21%

More Related