©2004 Prentice Hall Business Publishing Introduction to Management Accounting, 2/e Werner/Jones Chapter 09 Decentralization: Segmented Reporting and Performance Evaluation

©2004 Prentice Hall Business Publishing Introduction to Management Accounting, 2/e Werner/Jones Paper  Next Topics (10-14)  Next Week  Introduction, Main, Conclusion, References  Min 6, maks 10 page  1.5 space, 12 font  Random Presentation

©2004 Prentice Hall Business Publishing Introduction to Management Accounting, 2/e Werner/Jones Learning Objective 1 Describe centralized and decentralized management styles.

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

11 - 5©2004 Prentice Hall Business Publishing Introduction to Management Accounting, 2/e Werner/Jones Centralized Management Top management makes most of the decisions. The most experienced managers are making the important decisions.

11 - 6©2004 Prentice Hall Business Publishing Introduction to Management Accounting, 2/e Werner/Jones Centralized Management Top managers spend their time making routine decisions. Top managers may not be familiar with the routine aspects of the business. Little opportunity for lower-level employees to gain experience.

11 - 7©2004 Prentice Hall Business Publishing Introduction to Management Accounting, 2/e Werner/Jones Decentralized Management Lower-level managers are responsible for management decisions that relate to their segment of the business. Decentralization is the delegation of decision-making authority throughout an organization.

11 - 8©2004 Prentice Hall Business Publishing Introduction to Management Accounting, 2/e Werner/Jones Decentralized Management Spreads the decision-making responsibilities. Provides an opportunity for lower-level managers to sharpen their decision-making skills. Decisions are made by managers most familiar with the problems. Allows top management to focus on strategic decisions.

11 - 9©2004 Prentice Hall Business Publishing Introduction to Management Accounting, 2/e Werner/Jones Decentralized Management Decisions may not entirely reflect the view of top managers. Decisions are made by less experienced managers.

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

©2004 Prentice Hall Business Publishing Introduction to Management Accounting, 2/e Werner/Jones Decentralization: The Major Issues The degree of decentralization Performance measurement Management compensation The setting of transfer prices

©2004 Prentice Hall Business Publishing Introduction to Management Accounting, 2/e Werner/Jones Learning Objective 2 Describe the different types of business segments and the problems associated with determining segments costs.

©2004 Prentice Hall Business Publishing Introduction to Management Accounting, 2/e Werner/Jones Business Segments A business segment represents a part of a company managed by a particular individual... or a part of a company about which separate information is needed.

©2004 Prentice Hall Business Publishing Introduction to Management Accounting, 2/e Werner/Jones Segment Reports Managers need information that relates to their business segment. Reports that provide information pertaining to a particular business segment are called segment reports.

©2004 Prentice Hall Business Publishing Introduction to Management Accounting, 2/e Werner/Jones Learning Objective 3 Prepare a segment income statement.

©2004 Prentice Hall Business Publishing Introduction to Management Accounting, 2/e Werner/Jones The Segment Income Statement An income statement prepared for one segment of a business is called a segment income statement. FunctionalFormatContributionIncomeFormat

©2004 Prentice Hall Business Publishing Introduction to Management Accounting, 2/e Werner/Jones The Segment Income Statement QUINTANA COMPANY MIAMI OFFICE Segment Income Statement For the Year Ended December 31, 2004 Sales$1,200,000 Variable cost 800,000 Contribution margin$ 400,000 Fixed cost for Miami office 300,000 Segment margin$ 100,000

©2004 Prentice Hall Business Publishing Introduction to Management Accounting, 2/e Werner/Jones Identifying Segment Costs By definition, variable costs are “caused” by some sort of activity or volume. If that activity or volume is related to a particular segment, then so is the variable cost. Fixed costs are more difficult to trace.

©2004 Prentice Hall Business Publishing Introduction to Management Accounting, 2/e Werner/Jones Identifying Segment Costs Fixed costs that arise to support a single segment are called direct (or traceable) fixed costs. Fixed costs that are related to more than one segment are common (or indirect) fixed costs.

©2004 Prentice Hall Business Publishing Introduction to Management Accounting, 2/e Werner/Jones Flandro Feed Stores 1 $105,000 ÷ $500,000 = 21% × $60,000 = $12,600 2 $225,000 ÷ $500,000 = 45% × $60,000 = $27,000 3 $170,000 ÷ $500,000 = 34% × $60,000 = $20,400 Allocation based on segment's sales Sales Variable cost Contribution margin Direct fixed cost Segment margin Common fixed cost Net income $500, , ,950$167,050 75,000 75,000 $ 92,050 60,000 60,000 $ 32,050 $105,000 73,750 73,750 $ 31,250 20,000 20,000 $ 11,250 12, ,600 1 $ (1,350) $225, , ,000 $ 84,000 32,000 32,000 $ 52,000 27, ,000 2 $ 25,000 $170, , ,200 $ 51,800 23,000 23,000 $ 28,800 20, ,400 3 $ 8,400 CompanyTotalNorthStoreSouthStoreCentralStore Segment Income Statement For the Year Ended December 31, 2005

©2004 Prentice Hall Business Publishing Introduction to Management Accounting, 2/e Werner/Jones Flandro Feed Stores With North Store Eliminated Sales Variable cost Contribution margin Direct fixed cost Segment margin Common fixed cost Net income $395, , ,200$138,800 55,000 55,000 $ 80,800 60,000 60,000 $ 20,800 $225, , ,000 $ 84,000 32,000 32,000 $ 52,000 34, ,200 2 $ 17,800 $170, , ,200 $ 51,800 23,000 23,000 $ 28,800 25, ,800 3 $ 3,000 2 $225,000 ÷ $395,000 = 57% × $60,000 = $34,200 3 $170,000 ÷ $395,000 = 43% × $60,000 = $25,800 CompanyTotalNorthStoreSouthStoreCentralStore Segment Income Statement For the Year Ended December 31, 2005

©2004 Prentice Hall Business Publishing Introduction to Management Accounting, 2/e Werner/Jones Flandro Feed Stores Without Allocation of Common Fixed Cost Sales Variable cost Contribution margin Direct fixed cost Segment margin Common fixed cost Net income $500, , ,950$167,050 75,000 75,000 $ 92,050 60,000 60,000 $ 32,050 $105,000 73,750 73,750 $ 31,250 20,000 20,000 $ 11,250 $225, , ,000 $ 84,000 32,000 32,000 $ 52,000 $170, , ,200 $ 51,800 23,000 23,000 $ 28,800 CompanyTotalNorthStoreSouthStoreCentralStore Segment Income Statement For the Year Ended December 31, 2005

©2004 Prentice Hall Business Publishing Introduction to Management Accounting, 2/e Werner/Jones Allocating Service Department CostServiceDepartmentPossible Allocation Basis Personnel Dept. Number of employees Finance Dept. ComputerOperations Maintenance Capital invested Computer mainframe time No. of personal computers Sq. ft. of building occupied Hours of maintenance Cafeteria Number of employees Number of meals served

©2004 Prentice Hall Business Publishing Introduction to Management Accounting, 2/e Werner/Jones Activity-Based Allocation This cost allocation method tends to be more fair and accurate. Managers will work to reduce the allocation base.

©2004 Prentice Hall Business Publishing Introduction to Management Accounting, 2/e Werner/Jones Evaluating Business Segments RevenuecentersRevenuecenters InvestmentcentersInvestmentcenters CostcentersCostcenters ProfitcentersProfitcenters

©2004 Prentice Hall Business Publishing Introduction to Management Accounting, 2/e Werner/Jones Define Cost Center Manager has control over and is held accountable for costs.

©2004 Prentice Hall Business Publishing Introduction to Management Accounting, 2/e Werner/Jones Define Profit Center Manager has control over and is held accountable for both costs and revenues.

©2004 Prentice Hall Business Publishing Introduction to Management Accounting, 2/e Werner/Jones Define Investment Center Manager has control over and is held accountable for costs, revenues, and assets.

©2004 Prentice Hall Business Publishing Introduction to Management Accounting, 2/e Werner/Jones Learning Objective 4 Evaluating Cost, Revenue and Profit Center /Users/ella/Documents/ZaSiDa/lectures/akmen/Tazkia_2010/ak men09-evaluating responsibility centre.ppt /Users/ella/Documents/ZaSiDa/lectures/akmen/Tazkia_2010/ak men09-evaluating responsibility centre.ppt

©2004 Prentice Hall Business Publishing Introduction to Management Accounting, 2/e Werner/Jones Learning Objective 5 Evaluating Investment Centre /Users/ella/Documents/ZaSiDa/lectures/akmen/Tazkia_2010/akmen0 9-EVA.ppt

©2004 Prentice Hall Business Publishing Introduction to Management Accounting, 2/e Werner/Jones Learning Objective 6 Describe the balanced scorecard and the importance of nonfinancial performance measures.

©2004 Prentice Hall Business Publishing Introduction to Management Accounting, 2/e Werner/Jones Four Balanced Scorecard Perspectives FinancialPerspective CustomerPerspectiveInternalProcessesPerspective InnovationPerspective Strategy

©2004 Prentice Hall Business Publishing Introduction to Management Accounting, 2/e Werner/Jones Four Balanced Scorecard Perspectives Financial To succeed financially  Operating income  ROI  EVA  Sales growth  Cost reductions Customer To achieve our vision of how we should appear to our customers  No. of new customers  Customer retention  Market share  Time to fill orders  Customer satisfaction

©2004 Prentice Hall Business Publishing Introduction to Management Accounting, 2/e Werner/Jones Four Balanced Scorecard Perspectives Internal To excel at having superior business processes to satisfy our shareholders and customers  Process quality measures measures  Lead time  Defect rates  Scrap measures InnovationandLearning To sustain our ability to change and improve.  Employee retention  Employee productivity  Training  Reskilling  Suggestion system