Description
This is a PPT explaining Segment Reporting and Decentralization.
Segment Reporting and Decentralization
Decentralization in Organizations
Benefits of Decentralization
Lower-level managers gain experience in decision-making. Lower-level decision often based on better information.
Top management freed to concentrate on strategy.
Decision-making authority leads to job satisfaction.
Lower level managers can respond quickly to customers.
Decentralization in Organizations
Lower-level managers may make decisions without seeing the “big picture.” Lower-level manager’s objectives may not be those of the organization. May be a lack of coordination among autonomous managers.
Disadvantages of Decentralization
May be difficult to spread innovative ideas in the organization.
Cost, Profit, and Investments Centers
Cost Center Profit Center Investment Center
Cost, profit, and investment centers are all known as responsibility centers.
Responsibility Center
Cost, Profit, and Investments Centers
Cost Center A segment whose manager has control over costs, but not over revenues or investment funds.
Cost, Profit, and Investments Centers
Revenues
Profit Center A segment whose manager has control over both costs and revenues, but no control over investment funds.
Sales Interest Other
Costs
Mfg. costs Commissions
Salaries
Other
Cost, Profit, and Investments Centers
Corporate Headquarters
Investment Center A segment whose manager has control over costs, revenues, and investments in operating assets.
Responsibility Centers
Investment Centers
Operations Vice President
Superior Foods Corporation Corporate Headquarters President and CEO
Finance Chief FInancial Officer
Legal General Counsel
Personnel Vice President
Salty Snacks Product Manger
Beverages Product Manager
Confections Product Manager
Bottling Plant Manager
Warehouse Manager
Distribution Manager
Cost Centers
Superior Foods Corporation provides an example of the various kinds of responsibility centers that exist in an organization.
Responsibility Centers
Superior Foods Corporation Corporate Headquarters President and CEO
Operations Vice President
Finance Chief FInancial Officer
Legal General Counsel
Personnel Vice President
Salty Snacks Product Manger
Beverages Product Manager
Confections Product Manager
Bottling Plant Manager
Warehouse Manager
Distribution Manager
Profit Centers
Superior Foods Corporation provides an example of the various kinds of responsibility centers that exist in an organization.
Responsibility Centers
Superior Foods Corporation Corporate Headquarters President and CEO
Operations Vice President
Finance Chief FInancial Officer
Legal General Counsel
Personnel Vice President
Salty Snacks Product Manger
Beverages Product Manager
Confections Product Manager
Bottling Plant Manager
Warehouse Manager
Distribution Manager
Cost Centers
Superior Foods Corporation provides an example of the various kinds of responsibility centers that exist in an organization.
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 . . .
Quick Mart
A Sales Territory
A Service Center
Superior Foods: Geographic Regions
Superior Foods Corporation $500,000,000
East $75,000,000
West $300,000,000
Midwest $55,000,000
South $70,000,000
Oregon $45,000,000
Washington $50,000,000
California $120,000,000
Mountain States $85,000,000
Superior Foods Corporation could segment its business by geographic regions.
Superior Foods: Customer Channel
Superior Foods Corporation $500,000,000
Convenience Stores $80,000,000 Supermarket Chains $280,000,000 Wholesale Distributors $100,000,000 Drugstores $40,000,000
Supermarket Chain A $85,000,000
Supermarket Chain B $65,000,000
Supermarket Chain C $90,000,000
Supermarket Chain D $40,000,000
Superior Foods Corporation could segment its business by customer channel.
Keys to Segmented Income Statements
There are two keys to building segmented income statements:
A contribution format should be used because it separates fixed from variable costs and it enables the calculation of a contribution margin.
Traceable fixed costs should be separated from common fixed costs to enable the calculation of a segment margin.
Identifying Traceable Fixed Costs
Traceable costs arise because of the existence of a particular segment and would disappear over time if the segment itself disappeared. No computer No computer division means . . . division manager.
Identifying Common Fixed Costs
Common costs arise because of the overall operation of the company and would not disappear if any particular segment were eliminated. No computer division but . . . We still have a company president.
Traceable Costs Can Become Common Costs
It is important to realize that the traceable fixed costs of one segment may be a common fixed cost of another segment.
For example, the landing fee paid to land an airplane at an airport is traceable to the particular flight, but it is not traceable to first-class, business-class, and economy-class passengers.
Segment Margin
The segment margin, which is computed by subtracting the traceable fixed costs of a segment from its contribution margin, is the best gauge of the long-run profitability of a segment.
Profits
Time
Traceable and Common Costs
Fixed Costs Don’t allocate common costs to segments. Common
Traceable
Activity-Based Costing
Activity-based costing can help identify how costs shared by more than one segment are traceable to individual segments.
Assume that three products, 9-inch, 12-inch, and 18-inch pipe, share 10,000 square feet of warehousing space, which is leased at a price of $4 per square foot. If the 9-inch, 12-inch, and 18-inch pipes occupy 1,000, 4,000, and 5,000 square feet, respectively, then ABC can be used to trace the warehousing costs to the three products as shown.
Pipe Products 9-inch 12-inch 18-inch Total Warehouse sq. ft. 1,000 4,000 5,000 10,000 Lease price per sq. ft. $ 4 $ 4 $ 4 $ 4 Total lease cost $ 4,000 $ 16,000 $ 20,000 $ 40,000
Levels of Segmented Statements
Webber, Inc. has two divisions.
Webber, Inc.
Computer Division
Television Division
Let’s look more closely at the Television Division’s income statement.
Levels of Segmented Statements
Our approach to segment reporting uses the contribution format. of goods Cost Income Statement
Contribution Margin Format Television Division Sales $ 300,000 Variable COGS 120,000 Other variable costs 30,000 Total variable costs 150,000 Contribution margin 150,000 Traceable fixed costs 90,000 Division margin $ 60,000
sold consists of variable manufacturing costs. Fixed and variable costs are listed in separate sections.
Levels of Segmented Statements
Our approach to segment reporting uses the contribution format.
Income Statement Contribution Margin Format Television Division Sales $ 300,000 Variable COGS 120,000 Other variable costs 30,000 Total variable costs 150,000 Contribution margin 150,000 Traceable fixed costs 90,000 Division margin $ 60,000
Contribution margin is computed by taking sales minus variable costs. Segment margin is Television’s contribution to profits.
Levels of Segmented Statements
Sales Variable costs CM Traceable FC Division margin Common costs Net operating income Income Statement Company Television $ 500,000 $ 300,000 230,000 150,000 270,000 150,000 170,000 90,000 100,000 $ 60,000 Computer $ 200,000 80,000 120,000 80,000 $ 40,000
Levels of Segmented Statements
Sales Variable costs CM Traceable FC Division margin Common costs Net operating income Income Statement Company Television $ 500,000 $ 300,000 230,000 150,000 270,000 150,000 170,000 90,000 100,000 $ 60,000 25,000 $ Computer $ 200,000 80,000 120,000 80,000 $ 40,000
Common costs should not be allocated to the 75,000 divisions. These costs would remain even if one of the divisions were eliminated.
Traceable Costs Can Become Common Costs
As previously mentioned, fixed costs that are traceable to one segment can become common if the company is divided into smaller segments.
Let’s see how this works using the Webber Inc. example!
Traceable Costs Can Become Common Costs
Webber’s Television Division
Television Division
Regular
Big Screen
Product Lines
Traceable Costs Can Become Common Costs
Income Statement Television Division Regular Sales $ 200,000 Variable costs 95,000 CM 105,000 Traceable FC 45,000 Product line margin $ 60,000 Common costs Divisional margin Big Screen $ 100,000 55,000 45,000 35,000 $ 10,000
We obtained the following information from the Regular and Big Screen segments.
Traceable Costs Can Become Common Costs
Income Statement Television Division Regular Sales $ 300,000 $ 200,000 Variable costs 150,000 95,000 CM 150,000 105,000 Traceable FC 80,000 45,000 Product line margin 70,000 $ 60,000 Common costs 10,000 Divisional margin $ 60,000 Big Screen $ 100,000 55,000 45,000 35,000 $ 10,000
Fixed costs directly traced to the Television Division
$80,000 + $10,000 = $90,000
Omission of Costs
Costs assigned to a segment should include all costs attributable to that segment from the company’s entire value chain.
Business Functions Making Up The Value Chain
R&D Product Design Customer Manufacturing Marketing Distribution Service
Inappropriate Methods of Allocating Costs Among Segments
Failure to trace costs directly
Inappropriate allocation base
Segment 1
Segment 2
Segment 3
Segment 4
Common Costs and Segments
Common costs should not be arbitrarily allocated to segments based on the rationale that “someone has to cover the common costs” for two reasons: 1. This practice may make a profitable business segment appear to be unprofitable.
2. Allocating common fixed costs forces managers to be held accountable for costs they cannot control.
Segment 1
Segment 2
Segment 3
Segment 4
Allocations of Common Costs
Income Statement Haglund's Lakeshore Bar $ 800,000 $ 100,000 310,000 60,000 490,000 40,000 246,000 26,000 244,000 $ 14,000 200,000 $ 44,000
Sales Variable costs CM Traceable FC Segment margin Common costs Profit
Restaurant $ 700,000 250,000 450,000 220,000 $ 230,000
Assume that Haglund’s Lakeshore prepared the segmented income statement as shown.
Quick Check ?
How much of the common fixed cost of $200,000 can be avoided by eliminating the bar? a. None of it. b. Some of it. c. All of it.
Quick Check ?
How much of the common fixed cost of $200,000 can be avoided by eliminating the bar?
a. None of it. b. Some of it. c. All of it.
A common fixed cost cannot be eliminated by dropping one of the segments.
Quick Check ?
Suppose square feet is used as the basis for allocating the common fixed cost of $200,000. How much would be allocated to the bar if the bar occupies 1,000 square feet and the restaurant 9,000 square feet?
a. $20,000 b. $30,000 c. $40,000 d. $50,000
Quick Check ?
Suppose square feet is used as the basis for allocating the common fixed cost of $200,000. How much would be allocated to the bar if the bar occupies 1,000 square feet and the restaurant 9,000 square feet? a. $20,000 The bar would be allocated b. $30,000 1/10 of the cost or $20,000. c. $40,000 d. $50,000
Quick Check ?
If Haglund’s allocates its common costs to the bar and the restaurant, what would be the reported profit of each segment?
Allocations of Common Costs
Income Statement Haglund's Lakeshore Bar $ 800,000 $ 100,000 310,000 60,000 490,000 40,000 246,000 26,000 244,000 14,000 200,000 20,000 $ 44,000 $ (6,000)
Sales Variable costs CM Traceable FC Segment margin Common costs Profit
Restaurant $ 700,000 250,000 450,000 220,000 230,000 180,000 $ 50,000
Hurray, now everything adds up!!!
Quick Check ?
Should the bar be eliminated? a. Yes b. No
Quick Check ?
Should the bar be eliminated? The profit was $44,000 before a. Yes eliminating the bar. If we eliminate b. No the bar, profit drops to $30,000! Income Statement
Haglund's Lakeshore $ 700,000 250,000 450,000 220,000 230,000 200,000 $ 30,000 Bar Restaurant $ 700,000 250,000 450,000 220,000 230,000 200,000 $ 30,000
Sales Variable costs CM Traceable FC Segment margin Common costs Profit
doc_592093086.ppt
This is a PPT explaining Segment Reporting and Decentralization.
Segment Reporting and Decentralization
Decentralization in Organizations
Benefits of Decentralization
Lower-level managers gain experience in decision-making. Lower-level decision often based on better information.
Top management freed to concentrate on strategy.
Decision-making authority leads to job satisfaction.
Lower level managers can respond quickly to customers.
Decentralization in Organizations
Lower-level managers may make decisions without seeing the “big picture.” Lower-level manager’s objectives may not be those of the organization. May be a lack of coordination among autonomous managers.
Disadvantages of Decentralization
May be difficult to spread innovative ideas in the organization.
Cost, Profit, and Investments Centers
Cost Center Profit Center Investment Center
Cost, profit, and investment centers are all known as responsibility centers.
Responsibility Center
Cost, Profit, and Investments Centers
Cost Center A segment whose manager has control over costs, but not over revenues or investment funds.
Cost, Profit, and Investments Centers
Revenues
Profit Center A segment whose manager has control over both costs and revenues, but no control over investment funds.
Sales Interest Other
Costs
Mfg. costs Commissions
Salaries
Other
Cost, Profit, and Investments Centers
Corporate Headquarters
Investment Center A segment whose manager has control over costs, revenues, and investments in operating assets.
Responsibility Centers
Investment Centers
Operations Vice President
Superior Foods Corporation Corporate Headquarters President and CEO
Finance Chief FInancial Officer
Legal General Counsel
Personnel Vice President
Salty Snacks Product Manger
Beverages Product Manager
Confections Product Manager
Bottling Plant Manager
Warehouse Manager
Distribution Manager
Cost Centers
Superior Foods Corporation provides an example of the various kinds of responsibility centers that exist in an organization.
Responsibility Centers
Superior Foods Corporation Corporate Headquarters President and CEO
Operations Vice President
Finance Chief FInancial Officer
Legal General Counsel
Personnel Vice President
Salty Snacks Product Manger
Beverages Product Manager
Confections Product Manager
Bottling Plant Manager
Warehouse Manager
Distribution Manager
Profit Centers
Superior Foods Corporation provides an example of the various kinds of responsibility centers that exist in an organization.
Responsibility Centers
Superior Foods Corporation Corporate Headquarters President and CEO
Operations Vice President
Finance Chief FInancial Officer
Legal General Counsel
Personnel Vice President
Salty Snacks Product Manger
Beverages Product Manager
Confections Product Manager
Bottling Plant Manager
Warehouse Manager
Distribution Manager
Cost Centers
Superior Foods Corporation provides an example of the various kinds of responsibility centers that exist in an organization.
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 . . .
Quick Mart
A Sales Territory
A Service Center
Superior Foods: Geographic Regions
Superior Foods Corporation $500,000,000
East $75,000,000
West $300,000,000
Midwest $55,000,000
South $70,000,000
Oregon $45,000,000
Washington $50,000,000
California $120,000,000
Mountain States $85,000,000
Superior Foods Corporation could segment its business by geographic regions.
Superior Foods: Customer Channel
Superior Foods Corporation $500,000,000
Convenience Stores $80,000,000 Supermarket Chains $280,000,000 Wholesale Distributors $100,000,000 Drugstores $40,000,000
Supermarket Chain A $85,000,000
Supermarket Chain B $65,000,000
Supermarket Chain C $90,000,000
Supermarket Chain D $40,000,000
Superior Foods Corporation could segment its business by customer channel.
Keys to Segmented Income Statements
There are two keys to building segmented income statements:
A contribution format should be used because it separates fixed from variable costs and it enables the calculation of a contribution margin.
Traceable fixed costs should be separated from common fixed costs to enable the calculation of a segment margin.
Identifying Traceable Fixed Costs
Traceable costs arise because of the existence of a particular segment and would disappear over time if the segment itself disappeared. No computer No computer division means . . . division manager.
Identifying Common Fixed Costs
Common costs arise because of the overall operation of the company and would not disappear if any particular segment were eliminated. No computer division but . . . We still have a company president.
Traceable Costs Can Become Common Costs
It is important to realize that the traceable fixed costs of one segment may be a common fixed cost of another segment.
For example, the landing fee paid to land an airplane at an airport is traceable to the particular flight, but it is not traceable to first-class, business-class, and economy-class passengers.
Segment Margin
The segment margin, which is computed by subtracting the traceable fixed costs of a segment from its contribution margin, is the best gauge of the long-run profitability of a segment.
Profits
Time
Traceable and Common Costs
Fixed Costs Don’t allocate common costs to segments. Common
Traceable
Activity-Based Costing
Activity-based costing can help identify how costs shared by more than one segment are traceable to individual segments.
Assume that three products, 9-inch, 12-inch, and 18-inch pipe, share 10,000 square feet of warehousing space, which is leased at a price of $4 per square foot. If the 9-inch, 12-inch, and 18-inch pipes occupy 1,000, 4,000, and 5,000 square feet, respectively, then ABC can be used to trace the warehousing costs to the three products as shown.
Pipe Products 9-inch 12-inch 18-inch Total Warehouse sq. ft. 1,000 4,000 5,000 10,000 Lease price per sq. ft. $ 4 $ 4 $ 4 $ 4 Total lease cost $ 4,000 $ 16,000 $ 20,000 $ 40,000
Levels of Segmented Statements
Webber, Inc. has two divisions.
Webber, Inc.
Computer Division
Television Division
Let’s look more closely at the Television Division’s income statement.
Levels of Segmented Statements
Our approach to segment reporting uses the contribution format. of goods Cost Income Statement
Contribution Margin Format Television Division Sales $ 300,000 Variable COGS 120,000 Other variable costs 30,000 Total variable costs 150,000 Contribution margin 150,000 Traceable fixed costs 90,000 Division margin $ 60,000
sold consists of variable manufacturing costs. Fixed and variable costs are listed in separate sections.
Levels of Segmented Statements
Our approach to segment reporting uses the contribution format.
Income Statement Contribution Margin Format Television Division Sales $ 300,000 Variable COGS 120,000 Other variable costs 30,000 Total variable costs 150,000 Contribution margin 150,000 Traceable fixed costs 90,000 Division margin $ 60,000
Contribution margin is computed by taking sales minus variable costs. Segment margin is Television’s contribution to profits.
Levels of Segmented Statements
Sales Variable costs CM Traceable FC Division margin Common costs Net operating income Income Statement Company Television $ 500,000 $ 300,000 230,000 150,000 270,000 150,000 170,000 90,000 100,000 $ 60,000 Computer $ 200,000 80,000 120,000 80,000 $ 40,000
Levels of Segmented Statements
Sales Variable costs CM Traceable FC Division margin Common costs Net operating income Income Statement Company Television $ 500,000 $ 300,000 230,000 150,000 270,000 150,000 170,000 90,000 100,000 $ 60,000 25,000 $ Computer $ 200,000 80,000 120,000 80,000 $ 40,000
Common costs should not be allocated to the 75,000 divisions. These costs would remain even if one of the divisions were eliminated.
Traceable Costs Can Become Common Costs
As previously mentioned, fixed costs that are traceable to one segment can become common if the company is divided into smaller segments.
Let’s see how this works using the Webber Inc. example!
Traceable Costs Can Become Common Costs
Webber’s Television Division
Television Division
Regular
Big Screen
Product Lines
Traceable Costs Can Become Common Costs
Income Statement Television Division Regular Sales $ 200,000 Variable costs 95,000 CM 105,000 Traceable FC 45,000 Product line margin $ 60,000 Common costs Divisional margin Big Screen $ 100,000 55,000 45,000 35,000 $ 10,000
We obtained the following information from the Regular and Big Screen segments.
Traceable Costs Can Become Common Costs
Income Statement Television Division Regular Sales $ 300,000 $ 200,000 Variable costs 150,000 95,000 CM 150,000 105,000 Traceable FC 80,000 45,000 Product line margin 70,000 $ 60,000 Common costs 10,000 Divisional margin $ 60,000 Big Screen $ 100,000 55,000 45,000 35,000 $ 10,000
Fixed costs directly traced to the Television Division
$80,000 + $10,000 = $90,000
Omission of Costs
Costs assigned to a segment should include all costs attributable to that segment from the company’s entire value chain.
Business Functions Making Up The Value Chain
R&D Product Design Customer Manufacturing Marketing Distribution Service
Inappropriate Methods of Allocating Costs Among Segments
Failure to trace costs directly
Inappropriate allocation base
Segment 1
Segment 2
Segment 3
Segment 4
Common Costs and Segments
Common costs should not be arbitrarily allocated to segments based on the rationale that “someone has to cover the common costs” for two reasons: 1. This practice may make a profitable business segment appear to be unprofitable.
2. Allocating common fixed costs forces managers to be held accountable for costs they cannot control.
Segment 1
Segment 2
Segment 3
Segment 4
Allocations of Common Costs
Income Statement Haglund's Lakeshore Bar $ 800,000 $ 100,000 310,000 60,000 490,000 40,000 246,000 26,000 244,000 $ 14,000 200,000 $ 44,000
Sales Variable costs CM Traceable FC Segment margin Common costs Profit
Restaurant $ 700,000 250,000 450,000 220,000 $ 230,000
Assume that Haglund’s Lakeshore prepared the segmented income statement as shown.
Quick Check ?
How much of the common fixed cost of $200,000 can be avoided by eliminating the bar? a. None of it. b. Some of it. c. All of it.
Quick Check ?
How much of the common fixed cost of $200,000 can be avoided by eliminating the bar?
a. None of it. b. Some of it. c. All of it.
A common fixed cost cannot be eliminated by dropping one of the segments.
Quick Check ?
Suppose square feet is used as the basis for allocating the common fixed cost of $200,000. How much would be allocated to the bar if the bar occupies 1,000 square feet and the restaurant 9,000 square feet?
a. $20,000 b. $30,000 c. $40,000 d. $50,000
Quick Check ?
Suppose square feet is used as the basis for allocating the common fixed cost of $200,000. How much would be allocated to the bar if the bar occupies 1,000 square feet and the restaurant 9,000 square feet? a. $20,000 The bar would be allocated b. $30,000 1/10 of the cost or $20,000. c. $40,000 d. $50,000
Quick Check ?
If Haglund’s allocates its common costs to the bar and the restaurant, what would be the reported profit of each segment?
Allocations of Common Costs
Income Statement Haglund's Lakeshore Bar $ 800,000 $ 100,000 310,000 60,000 490,000 40,000 246,000 26,000 244,000 14,000 200,000 20,000 $ 44,000 $ (6,000)
Sales Variable costs CM Traceable FC Segment margin Common costs Profit
Restaurant $ 700,000 250,000 450,000 220,000 230,000 180,000 $ 50,000
Hurray, now everything adds up!!!
Quick Check ?
Should the bar be eliminated? a. Yes b. No
Quick Check ?
Should the bar be eliminated? The profit was $44,000 before a. Yes eliminating the bar. If we eliminate b. No the bar, profit drops to $30,000! Income Statement
Haglund's Lakeshore $ 700,000 250,000 450,000 220,000 230,000 200,000 $ 30,000 Bar Restaurant $ 700,000 250,000 450,000 220,000 230,000 200,000 $ 30,000
Sales Variable costs CM Traceable FC Segment margin Common costs Profit
doc_592093086.ppt