Accounting Using Excel for Success PowerPoint Presentation by: Douglas Cloud, Professor Emeritus Accounting, Pepperdine University © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password- protected website for classroom use. Performance Evaluation for Decentralized Operations 24 Student Version

Describe the advantages and disadvantages of decentralized operations. 24-2

In a decentralized company, managers of separate divisions or units are delegated operating responsibility. The division (unit) managers are responsible for planning and controlling the operations of their divisions. Decentralized Operations 1

Responsibility accounting is the process of measuring and reporting operating data by responsibility centers. Three common types of responsibility centers are— Cost centers Profit centers Investment centers 1

Prepare a responsibility accounting report for a cost center. 24-5

Responsibility Accounting for Cost Centers A cost center manager has responsibility for controlling the costs. 2

Prepare responsibility accounting reports for a profit center. 24-7

In a profit center, the unit manager has the responsibility and the authority to make decisions that affect both costs and revenues (and thus profits). Profit Center 3

Service Department Charges Services provided by internal centralized service departments are often more efficient than services contracted with outside providers. An internal service cost is called a service department charge. 3

NEG Example NEG’s expenses for the year ended Decem- ber 31, 2010 for each service department are as follows: Purchasing$400,000 Payroll Accounting255,000 Legal 250,000 Total$905,000 (continued) 3

The activity base for each service depart- ment is a measure of the services performed. For NEG, the following applies: PurchasingNumber of purchase requisitions Payroll AccountingNumber of payroll checks LegalNumber of billed hours (continued) 3

Purchasing Theme Park Division25,000 purchase requisitions Movie Production Division15,000 Total40,000 purchase requisitions $400,000 40,000 purchase requisitions = $10 per purchase requisition Service Usage 3 (continued)

Service Usage Payroll Accounting Theme Park Division12,000 payroll checks Movie Production Division 3,000 Total15,000 payroll checks $255,000 15,000 payroll checks = $17 per payroll check (continued) 3

Service Usage Legal Theme Park Division 100 billed hours Movie Production Division 900 Total1,000 billed hours $250,000 1,000 hours = $250 per hour (continued) 3

Compute and interpret the rate of return on investment, the residual income, and the balanced scorecard for an investment center

An investment center manager has the responsibility and the authority to make decisions that affect not only costs and revenues, but also the assets invested in the center. 4 Investment Center

Investment Turnover Profit Margin Profit $$$ 4 Revenue s

Investment Turnover Profit Margin Profit margin is the ratio of income from operations to sales 4

Investment turnover is the ratio of sales to invested assets Investment Turnover 4

Rate of Return on Investment One measure that considers the amount of assets invested in an investment center is the rate of return on investment (ROI) or rate of return on assets. ROI = Income from Operations Invested Assets 4

Income from Operations Sales Invested Assets × ROI = DuPont Formula Profit Margin Investment Turnover 4

ROI = $ 70,000 $560,000 × $350,000 ROI = 12.5% × 1.6 DataLink’s Northern Division (ROI) Income from Operations Sales Invested Assets × ROI = 20% 4

ROI = $ 84,000 $672,000 × $700,000 ROI = 12.5% × 0.96 Income from Operations Sales Invested Assets × ROI = 12% DataLink’s Central Division (ROI) 4

ROI = $ 75,000 $750,000 × $500,000 ROI = 10% × 1.5 Income from Operations Sales Invested Assets × ROI = 15% DataLink’s Southern Division (ROI) 4

DataLink’s Northern Division Proposal Assume that the revenues of the Northern Division could be increased by $56,000 through increasing advertising to $385,000. 4

Revenues ($560,000 + $56,000)$616,000 Operating expenses 385,000 Income from operations before service department charges$231,000 Service department charges 154,000 Income from operations$ 77,000 Projected Impact of Change Increase of $7,000 4

ROI = $ 77,000 $616,000 × $350,000 ROI = 12.5% × 1.76 DataLink’s Northern Division (ROI) Revised Income from Operations Sales Invested Assets × ROI = 22% 4

Residual Income Residual income is the excess of income from operations over a minimum acceptable income from operations. 4

NorthernCentralSouthern DivisionDivisionDivision Income from operations$70,000$84,000$75,000 Minimum acceptable income from operations as a percent of invested assets: $700,000 × 10%70,000 $500,000 × 10%50,000 Residual income$35,000$14,000$25,000 $350,000 × 10%35,000 4

Describe and illustrate how the market price, negotiated price, and cost price approaches to transfer pricing may be used by decentralized segments of a business

When divisions transfer products or render services to each other, a transfer price is used to charge for the products or services. Transfer Pricing 5

Market Price Approach Using the market price approach, the transfer price is the price at which the product or service transferred could be sold to outside buyers. 5

The negotiated price approach allows the managers of decentralized units to agree (negotiate) among themselves as to the transfer price. Negotiated Price Approach 5

Cost Price Approach Under the cost price approach, cost is used to set transfer prices. Cost may refer to either total product cost per unit or variable cost per unit. 5