Date post: | 07-Jul-2018 |
Category: |
Documents |
Upload: | firlanasubekti |
View: | 231 times |
Download: | 0 times |
of 47
8/18/2019 Garch12 Decentralization
1/47
Segment Reportingand Decentralization5/03/04
Chapter 12
8/18/2019 Garch12 Decentralization
2/47
© The McGraw-Hill Companies, IncMcGraw-Hill/Irwin
Decentralization inOrganizations
Benefits of
DecentralizationTop management
freed to concentrateon strategy.
Top managementfreed to concentrate
on strategy.
Lower-level managersgain experience indecision-making.
Lower-level managersgain experience indecision-making.
Decision-makingauthority leads to job satisfaction.
Decision-makingauthority leads to job satisfaction.
Lower-level decisionoften based on
better information.
Lower-level decisionoften based onbetter information.
Improves ability toevaluate managers.
Improves ability toevaluate managers.
8/18/2019 Garch12 Decentralization
3/47
© The McGraw-Hill Companies, IncMcGraw-Hill/Irwin
Decentralization inOrganizations
Disadvantages of
Decentralization
Lower-level managers
may make decisionswithout seeing thebig picture.!
Lower-level managersmay make decisionswithout seeing the
big picture.!
"ay be a lack of coordination among
autonomousmanagers.
"ay be a lack of coordination among
autonomousmanagers.
Lower-level manager#s
objectives may notbe those of theorgani$ation.
Lower-level manager#s
objectives may notbe those of theorgani$ation.
"ay be difficult tospread innovative ideas
in the organi$ation.
"ay be difficult tospread innovative ideas
in the organi$ation.
8/18/2019 Garch12 Decentralization
4/47
© The McGraw-Hill Companies, IncMcGraw-Hill/Irwin
Decentralization and SegmentReporting
A segmentsegment is any part oractivity of an
organization about
!ic! a manager see"scost# revenue# or profitdata$ A segment can
also be divisions#manufacturing plants#customers# product
lines# departments# etc$
%uick "art
&n Individual 'tore
& 'ales Territory
& 'ervice (enter
8/18/2019 Garch12 Decentralization
5/47
© The McGraw-Hill Companies, IncMcGraw-Hill/Irwin
%ost# &rofit# and 'nvestments%enters
(ost (enter A segment !ose
manager !as controlover costs#
but not over revenuesor investment funds$
Accounting# personnel#R ( D#legal# admin$#
)anufacturing# etc$
8/18/2019 Garch12 Decentralization
6/47
© The McGraw-Hill Companies, IncMcGraw-Hill/Irwin
%ost# &rofit# and 'nvestments%enters
)rofit (enter A business segment
!ose manager !ascontrol over both
costs and revenues#but no control overinvestment funds$
ie$# operations# productlines
*evenues'ales
Interest+ther
(osts"fg. costs
(ommissions
'alaries
+ther
8/18/2019 Garch12 Decentralization
7/47© The McGraw-Hill Companies, IncMcGraw-Hill/Irwin
%ost# &rofit# and 'nvestments%enters
Investment (enter
A segment !osemanager !as control
over costs#revenues# andinvestments in
operating assets$
Divisions# Subsidiaries
(orporate ,eaduarters
8/18/2019 Garch12 Decentralization
8/47© The McGraw-Hill Companies, IncMcGraw-Hill/Irwin
Segmenting %osts
*ariable costs are easily traceable tot!eir respective segments
+i,ed costs must be divided up intot!ose costs t!at are traceable tosegments and t!ose t!at are not
Only t!ose costs t!at are traceable to asegment ill be assigned to a segment
8/18/2019 Garch12 Decentralization
9/47© The McGraw-Hill Companies, IncMcGraw-Hill/Irwin
-raceable and %ommon %osts
ixed(osts
TraceableTraceable
(osts arise because(osts arise because
of the existence of of the existence of
a particular segmenta particular segment
(ommon(ommon
& cost that supports more than one& cost that supports more than one
segment but that would not gosegment but that would not go
away if any particular segmentaway if any particular segment
were eliminated.were eliminated.
Don#t allocateDon#t allocate
common costs.common costs.
8/18/2019 Garch12 Decentralization
10/47© The McGraw-Hill Companies, IncMcGraw-Hill/Irwin
'dentifying -raceable +i,ed%osts
Traceable costs ould disappear over timeif t!e segment itself disappeared$
/o computer/o computer
division means . . .division means . . ./o computer /o computer
division manager.division manager.
8/18/2019 Garch12 Decentralization
11/47© The McGraw-Hill Companies, IncMcGraw-Hill/Irwin
'dentifying %ommon +i,ed%osts
(ommon costs arise because of overalloperation of t!e company and are not due to
t!e e,istence of a particular segment$
/o computer/o computer
division but . . .division but . . .0e still have a0e still have a
company president.company president.
8/18/2019 Garch12 Decentralization
12/47© The McGraw-Hill Companies, IncMcGraw-Hill/Irwin
.evels of SegmentedStatements
Let#s look more closely at the TelevisionDivision#s income statement.
Let#s look more closely at the TelevisionDivision#s income statement.
Webber, Inc. has two divisions.
( o m p u t e r D i v i s i o n T e l e v i s i o n D i v i s i o n
0 e b b e r 1 I n c .
8/18/2019 Garch12 Decentralization
13/47© The McGraw-Hill Companies, IncMcGraw-Hill/Irwin
.evels of SegmentedStatements
Our approac! to segment reporting uses t!econtribution format$
Income 'tatement
(ontribution "argin .ormat
Television Division
'ales 23313334
5ariable (+6' 7831333
+ther variable costs 231333
Total variable costs 7931333 (ontribution margin 7931333
Traceable fixed costs :31333
Division margin ;313334
(ost of goodssold consists of
variablemanufacturing
costs only.
(ost of goodssold consists of
variablemanufacturing
costs only.
ixed andvariable costsare listed in
separatesections.
ixed andvariable costsare listed in
separatesections.
8/18/2019 Garch12 Decentralization
14/47© The McGraw-Hill Companies, IncMcGraw-Hill/Irwin
.evels of SegmentedStatements
'egment marginis Television#s
contribution
to profits.
'egment marginis Television#s
contribution
to profits.
Our approac! to segment reporting uses t!econtribution format$
Income 'tatement
(ontribution "argin .ormat
Television Division
'ales 23313334
5ariable (+6' 7831333
+ther variable costs 231333
Total variable costs 7931333 (ontribution margin 7931333
Traceable fixed costs :31333
'egment "argin ;313334
8/18/2019 Garch12 Decentralization
15/47© The McGraw-Hill Companies, IncMcGraw-Hill/Irwin
.evels of SegmentedStatements
Let#s see how the TelevisionLet#s see how the Television
Division
8/18/2019 Garch12 Decentralization
16/47
© The McGraw-Hill Companies, IncMcGraw-Hill/Irwin
.evels of SegmentedStatements
Income 'tatement
(ompany Television (omputer
'ales 93313334 23313334 83313334
5ariable costs 8231333 7931333 =31333
(" 8>31333 7931333 7831333 Traceable .( 7>31333 :31333 =31333
'egment "argin 7331333 ;313334 ?313334
(ommon costs
/et operating income
8/18/2019 Garch12 Decentralization
17/47
© The McGraw-Hill Companies, IncMcGraw-Hill/Irwin
.evels of SegmentedStatements
Income 'tatement
(ompany Television (omputer
'ales 93313334 23313334 83313334
5ariable costs 8231333 7931333 =31333
(" 8>31333 7931333 7831333 Traceable .( 7>31333 :31333 =31333
'egment "argin 7331333 ;313334 ?313334
(ommon costs 891333
/et operating income >913334
(ommon costs should notbe allocated to the
divisions. These costswould remain even if one
of the divisions wereeliminated.
(ommon costs should not
be allocated to thedivisions. These costs
would remain even if oneof the divisions were
eliminated.
8/18/2019 Garch12 Decentralization
18/47
© The McGraw-Hill Companies, IncMcGraw-Hill/Irwin
-raceable %osts %an ecome%ommon %osts
+i,ed costs t!at are traceable on onesegmented statement can become
common if t!e company is divided into smallersmaller segments$
Let’s see how this works!
8/18/2019 Garch12 Decentralization
19/47
© The McGraw-Hill Companies, IncMcGraw-Hill/Irwin
@ . ' . ' a l e s o r e i g n ' a l e s
* e g u l a r
@ . ' . ' a l e s o r e i g n ' a l e s
A i g ' c r e e n
T e l e v i s i o n
D i v i s i o n
-raceable %osts %an ecome%ommon %osts
ProductProduct
LinesLines
SalesSales
TerritoriesTerritories
Webber’s Television Division
8/18/2019 Garch12 Decentralization
20/47
© The McGraw-Hill Companies, IncMcGraw-Hill/Irwin
-raceable %osts %an ecome%ommon %osts
We obtained the following information fromthe egular and ig Screen segments.
Income 'tatementTelevision
Division *egular Aig 'creen
'ales 83313334 73313334
5ariable costs :91333 991333
(" 7391333 ?91333 Traceable .( ?91333 291333
)roduct line margin ;313334 7313334
(ommon costs
Divisional margin
8/18/2019 Garch12 Decentralization
21/47
8/18/2019 Garch12 Decentralization
22/47
© The McGraw-Hill Companies, IncMcGraw-Hill/Irwin
Income 'tatementTelevision
Division *egular Aig 'creen
'ales 23313334 83313334 73313334
5ariable costs 7931333 :91333 991333
(" 7931333 7391333 ?91333 Traceable .( =31333 ?91333 291333
)roduct line margin >31333 ;313334 7313334
(ommon costs 731333
Divisional margin ;313334
-raceable %osts %an ecome%ommon %osts
The remaining 4731333 cannot be traced toeither the *egular or Aig 'creen product lines.
8/18/2019 Garch12 Decentralization
23/47
© The McGraw-Hill Companies, IncMcGraw-Hill/Irwin
Segment )argin
-!e segment margin is t!e best gaugebest gauge oft!e longrun profitability of a segment$
TimeTime
) r o
f i t s
) r o
f i t s
1i d & %
8/18/2019 Garch12 Decentralization
24/47
© The McGraw-Hill Companies, IncMcGraw-Hill/Irwin
1indrances to &roper %ost Assignment
The ProblemsThe Problems
+mission of some5alue-chain costs in the
assignment process1
@pstream downstream
&ssignment of coststo segments that are
really common costs of
the entire organi$ation.
The use of inappropriate
methods for allocating
costs among segments1
ie1 'ales1 or DL in automated plant
8/18/2019 Garch12 Decentralization
25/47
© The McGraw-Hill Companies, IncMcGraw-Hill/Irwin
Omission of %osts
%osts assigned to a segment s!ould includeall costs attributable to t!at segment from
t!e company2s entire value c!ainvalue c!ain$
&roduct %ustomerR(D Design )anufacturing )ar"eting Distribution Service
Ausiness unctionsAusiness unctions
"aking @p The"aking @p The
5alue (hain5alue (hain
8/18/2019 Garch12 Decentralization
26/47
© The McGraw-Hill Companies, IncMcGraw-Hill/Irwin
'nappropriate )et!ods of Allocating%osts Among Segments
'egment7
'egment2
'egment?
ailure to tracecosts directly
&rbitrarily dividingcommon costs
among segments
Inappropriateallocation base
'egment8
8/18/2019 Garch12 Decentralization
27/47
8/18/2019 Garch12 Decentralization
28/47
© The McGraw-Hill Companies, IncMcGraw-Hill/Irwin
uic" %!ec"
1o muc! of t!e common fi,ed cost of00#000 can be avoided by eliminating t!ebar6
a$ 7one of it$b$ Some of it$
c$ All of it$
8/18/2019 Garch12 Decentralization
29/47
© The McGraw-Hill Companies, IncMcGraw-Hill/Irwin
uic" %!ec"
1o muc! of t!e common fi,ed cost of00#000 can be avoided by eliminating t!ebar6
a$ 7one of it$b$ Some of it$
c$ All of it$
A common fixed cost cannot beeliminated by dropping one of
the segments
8/18/2019 Garch12 Decentralization
30/47
© The McGraw-Hill Companies, IncMcGraw-Hill/Irwin
Income 'tatement,aglundEs
Lakeshore Aar *estaurant
'ales =3313334 73313334 >3313334
5ariable costs 2731333 ;31333 8931333
(" ?:31333 ?31333 ?931333
Traceable .( 8?;1333 8;1333 8831333
'egment margin 8??1333 7?1333 8231333
(ommon costs 8331333 891333 7>91333
)rofit ??13334 F771333G4 9913334
Allocations of %ommon %osts
Allocated on t!e basis of sales$
Hurray, now everything adds up!!!
8/18/2019 Garch12 Decentralization
31/47
© The McGraw-Hill Companies, IncMcGraw-Hill/Irwin
Income 'tatement,aglundEs
Lakeshore Aar *estaurant
'ales =3313334 73313334 >3313334
5ariable costs 2731333 ;31333 8931333
(" ?:31333 ?31333 ?931333
Traceable .( 8?;1333 8;1333 8831333
'egment margin 8??1333 7?1333 8231333
(ommon costs 8331333 891333 7>91333
)rofit ??13334 F771333G4 9913334
Allocations of %ommon %osts
Whoops, what about the bar???
8/18/2019 Garch12 Decentralization
32/47
© The McGraw-Hill Companies, IncMcGraw-Hill/Irwin
uic" %!ec"
S!ould t!e bar be eliminated6
a$ 8es
b$ 7o
8/18/2019 Garch12 Decentralization
33/47
© The McGraw-Hill Companies, IncMcGraw-Hill/Irwin
S!ould t!e bar be eliminated6
a$ 8es
b$ 7o
uic" %!ec"
Income 'tatement
,aglundEs
Lakeshore Aar *estaurant
'ales >3313334 >3313334
5ariable costs 8931333 8931333 (" ?931333 ?931333
Traceable .( 8831333 8831333
'egment margin 8231333 8231333
(ommon costs 8331333 8331333
)rofit 2313334 2313334
The profit was 4??1333 beforeeliminating the bar. If we eliminate
the bar1 profit drops to 4231333H
8/18/2019 Garch12 Decentralization
34/47
© The McGraw-Hill Companies, IncMcGraw-Hill/Irwin
-eac!ing 7ote
&llocating common fixed costs to thesegments those fixed costs support is a
recipe for disaster
R t ' t t 9RO':
8/18/2019 Garch12 Decentralization
35/47
© The McGraw-Hill Companies, IncMcGraw-Hill/Irwin
Return on 'nvestment 9RO':+ormula
"I #"I #$et o%erating income$et o%erating income&verage o%erating assets&verage o%erating assets
(ash1 accounts receivable1 inventory1plant and euipment1 and other
productive assets.
(ash1 accounts receivable1 inventory1plant and euipment1 and other
productive assets.
Income before interestand taxes FAITG
Income before interestand taxes FAITG
R t ' t t 9RO':
8/18/2019 Garch12 Decentralization
36/47
© The McGraw-Hill Companies, IncMcGraw-Hill/Irwin
Return on 'nvestment 9RO':+ormula
Regal %ompany reports t!eRegal %ompany reports t!efolloing;folloing;
7et operating income 30#0007et operating income 30#000 Average operating assets 00#000 Average operating assets 00#000
Sales 500#000Sales 500#000
'(),)))'*)),)))
# +-+-"I #
Ret rn on 'n estment 9RO':
8/18/2019 Garch12 Decentralization
37/47
© The McGraw-Hill Companies, IncMcGraw-Hill/Irwin
Return on 'nvestment 9RO':+ormula
"I #"I #$et o%erating income$et o%erating income
&verage o%erating assets&verage o%erating assets
argin #argin #$et o%erating income$et o%erating incomeSalesSales
Turnover #Turnover #SalesSales
&verage o%erating asset&verage o%erating asset
"I #"I #arginargin TurnoverTurnover
Return on 'nvestment 9RO':
8/18/2019 Garch12 Decentralization
38/47
© The McGraw-Hill Companies, IncMcGraw-Hill/Irwin
Return on 'nvestment 9RO':+ormula
'(),)))')),)))
/')),)))'*)),)))
"I #
0-0- *. # +-*. # +-"I #
"I #"I #arginargin TurnoverTurnover
$et o%erating income
Sales
Sales
&verage o%erating asset
/"I #
8/18/2019 Garch12 Decentralization
39/47
© The McGraw-Hill Companies, IncMcGraw-Hill/Irwin
%ontrolling t!e Rate of Return
-!ree ays to improve RO' $ $ $-!ree ays to improve RO' $ $ $
IncreaseIncrease
'ales'ales
*educe*educe
xpensesxpenses*educe*educe
&ssets&ssets
8/18/2019 Garch12 Decentralization
40/47
© The McGraw-Hill Companies, IncMcGraw-Hill/Irwin
%ontrolling t!e Rate of Return
Regal2s manager as able to increasesales to
8/18/2019 Garch12 Decentralization
41/47
8/18/2019 Garch12 Decentralization
42/47
© The McGraw-Hill Companies, IncMcGraw-Hill/Irwin
%riticisms of RO'
"anagement may not knowhow to increase *+I.
"anagers often inherit manycommitted costs over whichthey have no control.
"anagers evaluated on *+I
may reject profitableinvestment opportunitiesfor the company Fbecause
its bad for their *+IG.
8/18/2019 Garch12 Decentralization
43/47
© The McGraw-Hill Companies, IncMcGraw-Hill/Irwin
%riticisms of RO'
As division manager at =inston# 'nc$# yourcompensation pac"age includes a salary plus bonusbased on your division2s RO' t!e !ig!er your RO'#t!e bigger your bonus$
-!e company re>uires an RO' of ?5@ on all neinvestments your division !as been producing anRO' of 30@$
8ou !ave an opportunity to invest in a ne proect
t!at ill produce an RO' of 5@$
&s division manager would you&s division manager would you
invest in this projectKinvest in this projectK
8/18/2019 Garch12 Decentralization
44/47
© The McGraw-Hill Companies, IncMcGraw-Hill/Irwin
%riticisms of RO'
6ee . . .I thought we were
supposed to do whatwas best for the
companyH
&s division manager1I wouldn#t invest in
that project becauseit would lower my payH
8/18/2019 Garch12 Decentralization
45/47
© The McGraw-Hill Companies, IncMcGraw-Hill/Irwin
%riticisms of RO'
So to fi, t!is problem# c!ange t!eincentive plan to reard t!e manager
for any RO' over and above t!e firm2sRO'$
Du!B
8/18/2019 Garch12 Decentralization
46/47
© The McGraw-Hill Companies, IncMcGraw-Hill/Irwin
Revie &roblem ?
Redo report C eliminate common costallocation
Advise on !et!er to spend advertisingmoney to increase +amily .a practice$
Anser on &age 55553
8/18/2019 Garch12 Decentralization
47/47
nd of %!apter ?