chapter 09

©2004 Prentice Hall Business Publishing Introduction to Management Accounting , 2/e Werner/Jones11 - 1

Chapter 09

Decentralization: Segmented Reporting and Performance

Evaluation


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Learning Objective 1

Describe centralized and decentralized

management styles.

11 - 4©2004 Prentice Hall Business Publishing Introduction to Management Accounting , 2/e Werner/Jones

Corporate Organization Chart

Purcha sing Personnel V ice PresidentO pera tions

T rea surer C ontroller

C hief F ina ncia lO fficer

President

B oa rd of D irectors

Organizational Structure


Centralized Management

Top management makesTop management makesmost of the decisions.most of the decisions.

The most experienced managersThe most experienced managersare making the important decisions.are making the important decisions.


Centralized Management

Top managers spend their timeTop managers spend their timemaking routine decisions.making routine decisions.

Top managers may not be familiar withTop managers may not be familiar withthe routine aspects of the business.the routine aspects of the business.

Little opportunity for lower-levelLittle opportunity for lower-levelemployees to gain experience.employees to gain experience.


Decentralized Management

Lower-level managers are responsibleLower-level managers are responsiblefor management decisions that relatefor management decisions that relate

to their segment of the business.to their segment of the business.

Decentralization is the delegation of decision-making authority throughout an organization.

Decentralization is the delegation of decision-making authority throughout an organization.



Spreads the decision-making responsibilities.Spreads the decision-making responsibilities.

Provides an opportunity for lower-level managersProvides an opportunity for lower-level managersto sharpen their decision-making skills.to sharpen their decision-making skills.

Decisions are made by managersDecisions are made by managersmost familiar with the problems.most familiar with the problems.

Allows top management toAllows top management tofocus on strategic decisions.focus on strategic decisions.



Decisions may not entirely reflectDecisions may not entirely reflectthe view of top managers.the view of top managers.

Decisions are made by lessDecisions are made by lessexperienced managers.experienced managers.


Reasons for Decentralization

There are many reasons to explain why firms decide to decentralize, including:

1. Utilization of local information

2. Strategic focus of central management

3. Training and motivational opportunities for managers

4. Enhanced competition among divisions


Decentralization: The Major Issues

The degree of decentralization

Performance measurement

Management compensation

The setting of transfer prices



Describe the different types of business segments and the problems associated

with determining segments costs.


Business Segments

A business segment representsA business segment representsa part of a company manageda part of a company managed

by a particular individual...by a particular individual...

or a part of a company about whichor a part of a company about whichseparate information is needed.separate information is needed.


Segment Reports

Managers need information thatManagers need information thatrelates to their business segment.relates to their business segment.

Reports that provide informationReports that provide informationpertaining to a particular businesspertaining to a particular business

segment are called segment are called segment reportssegment reports..



Prepare a segment income statement.


The SegmentIncome Statement

An income statement prepared forAn income statement prepared forone segment of a business is calledone segment of a business is called

a a segment income statementsegment income statement..

FunctionalFunctionalFormatFormat

ContributionContributionIncomeIncomeFormatFormat


The SegmentIncome Statement

QUINTANA COMPANY MIAMI OFFICESegment Income Statement

For the Year Ended December 31, 2004

SalesSales $1,200,000$1,200,000Variable costVariable cost 800,000 800,000Contribution marginContribution margin $ 400,000$ 400,000Fixed cost for Miami officeFixed cost for Miami office 300,000 300,000Segment marginSegment margin $ 100,000$ 100,000


Identifying Segment Costs

By definition, variable costs are “caused”By definition, variable costs are “caused”by some sort of activity or volume.by some sort of activity or volume.

If that activity or volume is relatedIf that activity or volume is relatedto a particular segment, thento a particular segment, then

so is the variable cost.so is the variable cost.

Fixed costs are more difficult to trace.Fixed costs are more difficult to trace.


Identifying Segment Costs

Fixed costs that arise to supportFixed costs that arise to supporta single segment are calleda single segment are called

directdirect (or (or traceabletraceable) fixed costs.) fixed costs.

Fixed costs that are related to moreFixed costs that are related to morethan one segment are than one segment are commoncommon

(or (or indirect)indirect) fixed costs. fixed costs.


Flandro Feed Stores

11$105,000 ÷ $500,000 = 21% × $60,000 = $12,600 $105,000 ÷ $500,000 = 21% × $60,000 = $12,600 22$225,000 ÷ $500,000 = 45% × $60,000 = $27,000$225,000 ÷ $500,000 = 45% × $60,000 = $27,00033$170,000 ÷ $500,000 = 34% × $60,000 = $20,400$170,000 ÷ $500,000 = 34% × $60,000 = $20,400Allocation based on segment's salesAllocation based on segment's sales

SalesSalesVariable costVariable costContribution marginContribution marginDirect fixed costDirect fixed costSegment marginSegment marginCommon fixed costCommon fixed costNet incomeNet income

$500,000$500,000 332,950332,950$167,050$167,050 75,00075,000$ 92,050$ 92,050 60,00060,000$ 32,050$ 32,050

$105,000$105,000 73,75073,750$ 31,250$ 31,250 20,00020,000$ 11,250$ 11,250 12,60012,60011

$ (1,350)$ (1,350)

$225,000$225,000 141,000141,000$ 84,000$ 84,000 32,00032,000$ 52,000$ 52,000 27,00027,00022

$ 25,000$ 25,000

$170,000$170,000 118,200118,200$ 51,800$ 51,800 23,00023,000$ 28,800$ 28,800 20,40020,40033

$ 8,400$ 8,400

CompanyCompanyTotalTotal

NorthNorthStoreStore

SouthSouthStoreStore

CentralCentralStoreStore

Segment Income StatementSegment Income StatementFor the Year Ended December 31, 2005For the Year Ended December 31, 2005


Flandro Feed StoresWith North Store Eliminated


$395,000$395,000 259,200259,200$138,800$138,800 55,00055,000$ 80,800$ 80,800 60,00060,000$ 20,800$ 20,800

$225,000$225,000 141,000141,000$ 84,000$ 84,000 32,00032,000$ 52,000$ 52,000 34,20034,20022

$ 17,800$ 17,800

$170,000$170,000 118,200118,200$ 51,800$ 51,800 23,00023,000$ 28,800$ 28,800 25,80025,80033

$ 3,000$ 3,000

22$225,000 ÷ $395,000 = 57% × $60,000 = $34,200$225,000 ÷ $395,000 = 57% × $60,000 = $34,20033$170,000 ÷ $395,000 = 43% × $60,000 = $25,800$170,000 ÷ $395,000 = 43% × $60,000 = $25,800







Flandro Feed Stores Without Allocation of Common Fixed

Cost


$500,000$500,000 332,950332,950$167,050$167,050 75,00075,000$ 92,050$ 92,050 60,00060,000$ 32,050$ 32,050

$105,000$105,000 73,75073,750$ 31,250$ 31,250 20,00020,000$ 11,250$ 11,250

$225,000$225,000 141,000141,000$ 84,000$ 84,000 32,00032,000$ 52,000$ 52,000

$170,000$170,000 118,200118,200$ 51,800$ 51,800 23,00023,000$ 28,800$ 28,800







Allocating ServiceDepartment Cost

ServiceServiceDepartmentDepartment

PossiblePossibleAllocation BasisAllocation Basis

Personnel Dept.Personnel Dept. Number of employeesNumber of employees

Finance Dept.Finance Dept.

ComputerComputerOperationsOperations

MaintenanceMaintenance

Capital investedCapital invested

Computer mainframe timeComputer mainframe timeNo. of personal computersNo. of personal computers

Sq. ft. of building occupiedSq. ft. of building occupiedHours of maintenanceHours of maintenance

CafeteriaCafeteria Number of employeesNumber of employeesNumber of meals servedNumber of meals served


Activity-Based Allocation

This cost allocation method tendsThis cost allocation method tendsto be more fair and accurate.to be more fair and accurate.

Managers will work to reduceManagers will work to reducethe allocation base.the allocation base.


Evaluating Business Segments

RevenueRevenuecenterscentersRevenueRevenuecenterscenters

InvestmentInvestmentcenterscenters

InvestmentInvestmentcenterscenters

CostCostcenterscenters

CostCostcenterscenters

ProfitProfitcenterscenters

ProfitProfitcenterscenters


Define Cost Center

Manager has control over and is held accountable for costs.


Define Profit Center

Manager has control over and is held accountable for both

costs and revenues.


Define Investment Center

Manager has control over and is held accountable for costs, revenues, and assets.



Evaluating Cost, Revenue and Profit

Center/Users/ella/Documents/ZaSiDa/lectures/akmen/Tazkia_2010/akmen09-evaluating responsibility centre.ppt



Evaluating Investment Centre

/Users/ella/Documents/ZaSiDa/lectures/akmen/Tazkia_2010/akmen09-EVA.ppt



Describe the balanced scorecard and the

importance of nonfinancial performance measures.


Four BalancedScorecard Perspectives

FinancialFinancialPerspectivePerspective

CustomerCustomerPerspectivePerspective

InternalInternalProcessesProcesses

PerspectivePerspective

InnovationInnovationPerspectivePerspective

StrategyStrategy



FinancialFinancial To succeedTo succeedfinanciallyfinancially

Operating incomeOperating income ROIROI EVAEVA Sales growthSales growth Cost reductionsCost reductions

CustomerCustomer

To achieve ourTo achieve ourvision of how wevision of how weshould appear toshould appear toour customersour customers

No. of new customersNo. of new customers Customer retentionCustomer retention Market shareMarket share Time to fill ordersTime to fill orders Customer satisfactionCustomer satisfaction



InternalInternal

To excel at havingTo excel at havingsuperior businesssuperior business

processes to satisfyprocesses to satisfyour shareholdersour shareholdersand customersand customers

Process qualityProcess quality measuresmeasures Lead timeLead time Defect ratesDefect rates Scrap measuresScrap measures

InnovationInnovationandand

LearningLearning

To sustain ourTo sustain ourability to changeability to change

and improve.and improve.

Employee retentionEmployee retention Employee productivityEmployee productivity TrainingTraining ReskillingReskilling Suggestion systemSuggestion system