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Decentralization PowerPoint PPT Presentation


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12. Chapter. Segment Reporting and Decentralization. Decentralization. Autonomy. Authority to make decisions. Responsibility. Example of Decentralization. Proctor & Gamble. Baby Care. Fabric and Home Care. Food and Beverage. Production. Advantages? Disadvantages?

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12

Chapter

Segment Reporting and

Decentralization

Decentralization

Autonomy

Authority

to make decisions

Responsibility


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Example of Decentralization

Proctor & Gamble

Baby Care

Fabric and Home Care

Food and Beverage

Production

Advantages?

Disadvantages?

What management control system?

Marketing

Finance


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Responsibility Centers

  • Cost Center

  • Profit center

  • Investment center


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Segment Reporting

  • Possible segments:

    • divisions w/in a company

    • product lines w/in a division

  • Report by segment:

    • revenues

    • variable expenses

    • traceable fixed expenses

  • Do not allocate common fixed expenses to segments.

    • segment managers cannot control these

Segment margin


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Issues in Responsibility Accounting

  • Responsibility for which expenses?

    • Gain or loss on sale of equipment?

    • Depreciation?

    • Taxes?

  • Does responsibility require complete control?

  • Are comparisons meaningful across operating units?

  • Should common costs ever be allocated?


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Evaluating Investment Center Performance

Compagnie

du Froid

Required rate of return18%

Weighted-average cost of capital15%

Tax rate30%


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Fr 3,600

Fr 2,400

Fr 3,800

Fr 10,000

Fr 16,000

Fr 18,000

France

Italy

Spain

Revenue

Fr 75,400

Fr 42,500

Fr 59,900

Operating exp

71,600

40,100

56,300

Net income

Assets

Current assets

Fr 2,400

Fr 1,500

Fr 1,200

Plant & equip

22,900

18,700

20,100

Accum deprec.

(7,300)

(10,200)

(5,300)

Total assets

Current liabilities

Fr 4,200

Fr 1,100

Fr 800


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Income

Investment

France

Italy

Spain

Oper. Income

Fr 3,800

Fr 2,400

Fr 3,600

Fr 18,000

Fr 25,300

Fr 13,800

Fr 10,000

Fr 20,200

Fr 8,900

Fr 21,300

Fr 15,200

Fr 16,000

Return on Investment (ROI)

=

Total assets

Total assets

- current liab.

Alternative

Investment measures

Gross book value


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France

Italy

Spain

Oper. Income

Fr 3,800

Fr 2,400

Fr 3,600

Fr 18,000

Fr 10,000

Fr 16,000

Residual Income

= Income - (Required rate of return x Investment)

Total assets

ROI

Residual income


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After taxTotalCurrent

IncomeAssetsLiabilities

=-[ WACCx (- )]

France

Italy

Spain

Oper. Income

Fr 3,800

Fr 2,400

Fr 3,600

Total assets

Total assets

- current liab.

Residual income

Fr 560

Fr 600

Fr 720

3

2

1

Fr 13,800

Fr 18,000

Fr 8,900

Fr 10,000

Fr 15,200

Fr 16,000

ROI (assts-c_liab)

27.5%

27.0%

23.7%

1

2

3

Economic Value Added (EVA)

EVA


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Transfer Prices

The price one division charges to another

for goods or services.

Component Division

Cellular Phone Division

Micro-transmitter

Pocket Cellular


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Objectives of transfer pricing system:

  • Autonomy of the division managers.

  • Decisions are in the best interest of the firm.

  • Transfer price fairly represents each manager’s contribution to the firm.

  • Ease of implementation.


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Micro T

Pocket C

Other

Compnts

Other

Phones

Price

$ 10.00

$ 60.00

$ 50.00

$ 8.00

DM / unit

2.00

22.00

26.00

1.50

10.00

DL / unit

4.00

13.00

8.00

3.00

CM / unit

$ 4.00

$ 15.00

$ 16.00

$ 3.50

$ 2,000

$ 7,500

Units

500

500

3,000

4,500

$48,000

$15,750

Total CM

Transfer Pricing Example

Component Division

Cell Phone Division

A transfer price of $10.00.

Other phones are higher margin for Cell Phone Division.


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Micro T

Other

Compnts

Price

$ 10.00

$ 8.00

DM / unit

2.00

1.50

DL / unit

4.00

3.00

CM / unit

$ 4.00

$ 3.50

$ 2,000

Units

500

4,500

$15,750

Total CM

If Cell Phone Division wants to renegotiate…

Component Division

1.Component Division has idle capacity.

2.Component Division is at full capacity.

a.$10 mkt for Micro T

b.No mkt for Micro T


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Pocket C

Other

Phones

Price

$ 60.00

$ 50.00

DM / unit

22.00

26.00

10.00

DL / unit

13.00

8.00

CM / unit

$ 15.00

$ 16.00

$ 7,500

Units

500

3,000

$48,000

Total CM

If Component Division wants to renegotiate…

Cell Phone Division

1.Cell Phone Division has idle capacity.

a.$10 mkt for Micro T

b.No mkt for Micro T

2.Cell Phone Division is at full capacity.


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When is a transfer

in the best interest of the firm?

  • Answer: When a price can be found that will satisfy both managers.

    • If the transfer helps both divisions, it helps the firm as a whole.

    • Notice that a transfer is not always in the firm’s best interest.

2.Component Division is at full capacity.

2.Cell Phone Division is at full capacity.

b.No mkt for Micro T

Maximum price = $9

Minimum price = $9.50


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Possible Transfer Prices

Options

Variable cost + opportunity cost

Market price

Cost + mark-up

Negotiated by managers

Advantages

ensures optimal decisions for the firm

a good price if a market exists

easy to implement

manager autonomy

generally good decisions

Disadvantages

difficult to measure

markets often don’t exist or are imperfect

too high if supplying division has idle capacity

no incentives to control costs; OH allocation games

time-consuming


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