Segment Reporting and Decentralization

1. Segment Reporting and Decentralization UAA – ACCT 202 Principles of Managerial Accounting Dr. Fred Barbee

2. Decision Making The Work of Management Planning Organizing & Directing Evaluating Controlling

3. Controlling Operations • Management by exception • Responsibility Accounting • Delegation of authority • Management by walking around

4. Responsibility Accounting • . . . is a reporting system in which a cost is charged to the lowest level of management that has responsibility for it.

5. Installing Responsibility Accounting • Create a set of financial performance goals (budgets). • Measure and report actual performance. • Evaluate based on comparison of actual with budget.

6. Responsibility Accounting • Evaluation of responsibility centers depends on . . . • The extent of delegation of authority; and • A manager’s preference

7. Decentralization . . . • . . . the delegation of authority to the lowest level of management responsibility that can make decisions.

8. Centralization . . . • . . . A centralized organization is one in which little authority is delegated to lower level managers.

9. Decentralization • The more decentralized the firm, the greater the need for control. • Monitor employees • Motivate employees

10. Advantages of Decentralization • Top level managers are relieved of making routine decisions. • Higher employee morale • Training • Decisions are made where the action is taking place.

11. Disadvantages of Decentralization • Upper level management loses some control. • Lack of goal congruence. • Duplication of effort.

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

13. Cost, Profit, and Investments Centers Responsibility Centers Cost Center Profit Center Investment Center

14. Data Information (Outputs) (Inputs) Responsibility Centers: A Systems Perspective Processing Steps Within Information Systems Resources used . . . Capital . . . Output . . . Working Capital Equipment Etc. DM DL MOH Goods, Services, Ideas

15. Cost, Profit, and Investments Centers Cost Center A segment whose manager has control over costs, but not over revenues or investment funds.

16. Process Input Output Responsibility Centers: A Systems Perspective Cost Center Control only this

17. Evaluation . . . • A cost center is evaluated by means of performance reports (i.e., comparison of actual with standard).

18. Segments Classified as Cost, Profit and Investment Centers

19. Process Input Output Responsibility Centers: A Systems Perspective Profit Center Control these

20. Revenues Sales Interest Other Costs Mfg. costs Commissions Salaries Other Cost, Profit, and Investments Centers Profit Center A segment whose manager has control overbothcosts and revenues, but no control over investment funds.

21. A Profit Center . . . • A profit center is evaluated by means of contribution margin income statements.

22. Segments Classified as Cost, Profit and Investment Centers

23. Cost, Profit, and Investments Centers Investment Center A segment whose manager has control over costs, revenues, and investments in operating assets. Corporate Headquarters

24. Process Input Output Responsibility Centers: A Systems Perspective Investment Center Control these

25. Investment Center • An investment center is evaluated by means of the Return on Investment (ROI) or the Residual Income (RI) it is able to generate.

26. Segments Classified as Cost, Profit and Investment Centers Responsibility Centers

27. Profit Center Vs. Investment Center • A profit center is focused on profits as measured by the difference between revenues and expenses. • An investment center is compared with the assets employed in earning revenues.

28. Levels of Segmented Statements

29. Levels of Segmented Statements

30. Levels of Segmented Statements

31. Let’s look more closely at the Television Division’s income statement. Webber, Inc. has two divisions.

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

33. Our approach to segment reporting uses the contribution format. Segment margin is Television’s contribution to profits. Division Segment Margin

34. Fixed Costs Common Traceable Traceable and Common Costs Don’t allocate common costs. Costs arise because of the existence of a particular segment A cost that supports more than one segment but that would not go away if any particular segment were eliminated.

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

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

37. Levels of Segmented Statements Common costs should not be allocated to the divisions. These costs would remain even if one of the divisions were eliminated.

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

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

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

41. 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.

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

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

44. An Out-of-the-Text Out-of-the-Text Experience

45. Responsibility and Controllability

46. Controllability is . . . • The degree of influence that a specific manager has over costs, revenues, or other items in question.

47. Controllability • Few costs are clearly under the sole influence of one manager.

48. Controllability • With a long enough time span, all costs will come under someone’s control.

49. The Controllability Principle Management Actions Managers only partially control costs. Costs Uncontrollable Environmental Effects

50. Performance Measures Rewards The Controllability Principle . . . lead to more predictable rewards for managers. Management Actions Costs Uncontrollable Environmental Effects Performance measurement systems that are based on controllable costs . . .