Hansen AISE IM Ch10
Hansen AISE IM Ch10
Hansen AISE IM Ch10
10 SEGMENTED REPORTING
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LEARNING OBJECTIVES
LEARNING GOALS
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LEARNING OBJECTIVES
1. Explain how & why firms choose to
decentralize.
2. Explain the difference between absorption
& variable costing, & prepare segmented
income statements.
3. Compute & explain return on investment
(ROI).
Continued
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LEARNING OBJECTIVES
4. Compute & explain residual income &
economic value added (EVA).
5. Explain the role of transfer pricing in a
decentralized firm.
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QUESTIONS TO THINK ABOUT:
Galactic-Media Inc.
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QUESTIONS TO THINK ABOUT:
Galactic-Media Inc.
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QUESTIONS TO THINK ABOUT:
Galactic-Media Inc.
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LEARNING OBJECTIVE
1 firms choose to
decentralize.
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LO 1
What is a responsibility
accounting system?
A responsibility accounting
system measures the results of
responsibility centers according to
information managers need to
operate their centers.
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LO 1
CENTRALIZATION &
DECENTRALIZATION
EXHIBIT 10-1
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LO 1
REASONS FOR
DECENTRALIZATION
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LO 1
DIVISIONS IN DECENTRALIZED
FIRM
Decentralization achieved by creating divisions
by
Type of goods & services
Geographic lines
Type of responsibility given to divisional manager
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LO 1
RESPONSIBILITY CENTER:
Definition
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LO 1
RESPONSIBILITY CENTERS
Major types of responsibility centers are:
Cost centers
Manager responsible for cost only
Revenue center
Manager responsible for sales only
Profit center
Manager responsible for sales & costs
Investment center
Manager responsible for sales, costs, & capital
investment
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LEARNING OBJECTIVE
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LO 2
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LO 2
INVENTORY VALUATION:
Background
Units in beginning inventory 0
Units produced 10,000
Units sold ($300 per unit) 8,000
Variable costs per unit
Direct materials $ 50
Direct labor 100
Variable overhead 50
Fixed costs
Fixed overhead per unit produced 25
Fixed selling & administrative 100,000
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LO 2
ABSORPTION COSTING
Direct materials $ 50
Direct labor 100
Variable overhead 50
Fixed overhead per unit produced 25
Unit product cost $ 225
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LO 2
VARIABLE COSTING
Direct materials $ 50
Direct labor 100
Variable overhead 50
Unit product cost $ 200
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LO 2
COMPARATIVE INCOME
STATEMENTS
Income lower under
variable costing
where fixed costs are
expensed for period.
EXHIBIT 10-6
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LO 2
ABSORPTION INCOME
STATEMENT
Sales ($300 x 8,000) $ 2,400,000
Less Cost of goods sold 1,800,000
Gross margin $ 600,000
Less S&A expenses 100,000
Operating income $ 500,000
CGS =
8,000 x $ 225 = $ 1,800,000
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LO 2
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LO 2
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LO 2
EXPLANATION
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LO 2
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LO 2
SEGMENT: Definition
Is a subunit of a company of
sufficient importance to warrant
performance reports.
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LO 2
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LO 2
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LO 2
COMPARATIVE INCOME
STATEMENTS
Segment margin is
contribution to firm’s
common fixed costs.
EXHIBIT 10-11
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LEARNING OBJECTIVE
3 return on investment
(ROI).
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LO 3
FORMULA: ROI
ROI relates operating profits to assets
employed.
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LO 3
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LO 3
Alpha Beta
Operating income $ 100,000 $ 200,000
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LO 3
COMPARING ROI
ROI: ALPHA
= Op. Income / Ave. Op. Assets
= $100,000 / $500,000 = .20
ROI: BETA
= Op. Income / Ave. Op. Assets
= $200,000 / $2,000,000 = .10
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LO 3
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LO 3
What is margin?
What is turnover?
Sales $ 480,000
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LO 3
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LO 3
EXPLANATION: ROI
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LO 3
ADVANTAGES OF ROI
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LO 3
The current ROI is the hurdle rate used to make decisions about changes.
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LO 3
DISADVANTAGES OF ROI
Can product a narrow focus on divisional
profitability at expense of profitability for
overall firm
Encourages managers to focus on short run at
expense of long run
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LO 3
ALTERNATIVES: ROI
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LEARNING OBJECTIVE
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LO 4
RESIDUAL INCOME
Residual income is the difference between
operating income and minimum dollar return
on sales.
Residual Income
= Operating income
– (Min. rate of return x Ave. Operating Assets)
= $48,000 – (0.12 x $300,000)
= $12,000
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LO 4
* 10%
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LO 4
ADVANTAGES &
DISADVANTAGES: Residual Income
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LO 4
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LEARNING OBJECTIVE
5 transfer pricing in a
decentralized firm.
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LO 5
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LO 5
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LO 5
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CHAPTER 10
THE END
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