Professional Documents
Culture Documents
McGraw-Hill Education (Asia) Garrison, Noreen, Brewer, Cheng & Yuen Slide 2
Decentralization in Organizations
May be a lack of
coordination among
autonomous
Lower-level managers managers.
may make decisions
without seeing the
big picture. Disadvantages of
Decentralization
Lower-level managers
objectives may not
be those of the May be difficult to
organization. spread innovative ideas
in the organization.
McGraw-Hill Education (Asia) Garrison, Noreen, Brewer, Cheng & Yuen Slide 3
Cost, Profit, and Investments Centers
Cost, profit,
and investment
centers are all
known as Responsibility
Center
responsibility
centers.
McGraw-Hill Education (Asia) Garrison, Noreen, Brewer, Cheng & Yuen Slide 4
Cost Center
McGraw-Hill Education (Asia) Garrison, Noreen, Brewer, Cheng & Yuen Slide 5
Profit Center
Revenues
A segment whose
Sales
manager has control
Interest
over both costs and
Other
revenues,
Costs
but no control over
investment funds. Mfg. costs
Commissions
Salaries
Other
McGraw-Hill Education (Asia) Garrison, Noreen, Brewer, Cheng & Yuen Slide 6
Investment Center
Corporate Headquarters
A segment whose
manager has control
over costs, revenues,
and investments in
operating assets.
McGraw-Hill Education (Asia) Garrison, Noreen, Brewer, Cheng & Yuen Slide 7
Responsibility Centers
Investment
Centers Superior Foods Corporation
Corporate Headquarters
President and CEO
McGraw-Hill Education (Asia) Garrison, Noreen, Brewer, Cheng & Yuen Slide 11
Decentralization and Segment Reporting
An Individual Store
Popular Foods
McGraw-Hill Education (Asia) Garrison, Noreen, Brewer, Cheng & Yuen Slide 12
Superior Foods: Geographic Regions
Superior Foods
Corporation
$500,000,000
McGraw-Hill Education (Asia) Garrison, Noreen, Brewer, Cheng & Yuen Slide 13
Superior Foods: Customer Channel
Superior Foods
Corporation
$500,000,000
McGraw-Hill Education (Asia) Garrison, Noreen, Brewer, Cheng & Yuen Slide 15
Identifying Traceable Fixed Costs
No computer No computer
division means . . . division manager.
McGraw-Hill Education (Asia) Garrison, Noreen, Brewer, Cheng & Yuen Slide 16
Identifying Common Fixed Costs
McGraw-Hill Education (Asia) Garrison, Noreen, Brewer, Cheng & Yuen Slide 17
Traceable Costs Can Become
Common Costs
Time
McGraw-Hill Education (Asia) Garrison, Noreen, Brewer, Cheng & Yuen Slide 19
Traceable and Common Costs
Traceable Common
McGraw-Hill Education (Asia) Garrison, Noreen, Brewer, Cheng & Yuen Slide 20
Activity-Based Costing
Activity-based costing can help identify how costs
shared by more than one segment are traceable to
individual segments.
Assume that three products, 9-inch, 12-inch, and 18-inch pipe, share 10,000
square feet of warehousing space, which is leased at a price of $4 per square
foot.
If the 9-inch, 12-inch, and 18-inch pipes occupy 1,000, 4,000, and 5,000 square
feet, respectively, then ABC can be used to trace the warehousing costs to the
three products as shown.
Pipe Products
9-inch 12-inch 18-inch Total
Warehouse sq. ft. 1,000 4,000 5,000 10,000
Lease price per sq. ft. $ 4 $ 4 $ 4 $ 4
Total lease cost $ 4,000 $ 16,000 $ 20,000 $ 40,000
McGraw-Hill Education (Asia) Garrison, Noreen, Brewer, Cheng & Yuen Slide 21
Levels of Segmented Statements
Webber, Inc.
McGraw-Hill Education (Asia) Garrison, Noreen, Brewer, Cheng & Yuen Slide 22
Levels of Segmented Statements
Our approach to segment reporting uses the
contribution format.
Income Statement Cost of goods
Contribution Margin Format sold consists of
Television Division variable
Sales $ 300,000 manufacturing
Variable COGS 120,000 costs.
Other variable costs 30,000
Fixed and
Total variable costs 150,000
variable costs
Contribution margin 150,000
are listed in
Traceable fixed costs 90,000
separate
Division margin $ 60,000
sections.
McGraw-Hill Education (Asia) Garrison, Noreen, Brewer, Cheng & Yuen Slide 23
Levels of Segmented Statements
Our approach to segment reporting uses the
contribution format.
Income Statement
Contribution Margin Format Contribution margin
Television Division is computed by
Sales $ 300,000 taking sales minus
Variable COGS 120,000 variable costs.
Other variable costs 30,000
Total variable costs 150,000
Segment margin
Contribution margin 150,000 is Televisions
Traceable fixed costs 90,000 contribution
Division margin $ 60,000 to profits.
McGraw-Hill Education (Asia) Garrison, Noreen, Brewer, Cheng & Yuen Slide 24
Levels of Segmented Statements
Income Statement
Company Television Computer
Sales $ 500,000 $ 300,000 $ 200,000
Variable costs 230,000 150,000 80,000
CM 270,000 150,000 120,000
Traceable FC 170,000 90,000 80,000
Division margin 100,000 $ 60,000 $ 40,000
Common costs
Net operating
income
McGraw-Hill Education (Asia) Garrison, Noreen, Brewer, Cheng & Yuen Slide 25
Levels of Segmented Statements
Income Statement
Company Television Computer
Sales $ 500,000 $ 300,000 $ 200,000
Variable costs 230,000 150,000 80,000
CM 270,000 150,000 120,000
Traceable FC 170,000 90,000 80,000
Division margin 100,000 $ 60,000 $ 40,000
Common costs 25,000
Common costs should not
Net operating be allocated to the
income $ 75,000 divisions. These costs
would remain even if one
of the divisions were
eliminated.
McGraw-Hill Education (Asia) Garrison, Noreen, Brewer, Cheng & Yuen Slide 26
Traceable Costs Can Become
Common Costs
McGraw-Hill Education (Asia) Garrison, Noreen, Brewer, Cheng & Yuen Slide 27
Traceable Costs Can Become
Common Costs
Product
Lines
McGraw-Hill Education (Asia) Garrison, Noreen, Brewer, Cheng & Yuen Slide 28
Traceable Costs Can Become
Common Costs
Income Statement
Television
Division Regular Big Screen
Sales $ 200,000 $ 100,000
Variable costs 95,000 55,000
CM 105,000 45,000
Traceable FC 45,000 35,000
Product line margin $ 60,000 $ 10,000
Common costs
Divisional margin
McGraw-Hill Education (Asia) Garrison, Noreen, Brewer, Cheng & Yuen Slide 30
External Reports
The International Financial Reporting Standards (IFRS)
and US GAAP require companies to include segmented
financial data in their annual reports.
1. In addition to some compulsory
disclosure, companies must report
segmented results to shareholders
using the same measures to be used by
the Chief Operating Decision Maker
(CODM) to make decisions
2. Since the contribution approach to
segment reporting does not comply with
financial reporting standards, it is likely
that some managers will choose to
construct their segmented financial
statements using the absorption
approach to comply with GAAP.
McGraw-Hill Education (Asia) Garrison, Noreen, Brewer, Cheng & Yuen Slide 31
Omission of Costs
Product Customer
R&D Design Manufacturing Marketing Distribution Service
McGraw-Hill Education (Asia) Garrison, Noreen, Brewer, Cheng & Yuen Slide 32
Inappropriate Methods of Allocating Costs
Among Segments
Failure to trace
costs directly Inappropriate
allocation base
McGraw-Hill Education (Asia) Garrison, Noreen, Brewer, Cheng & Yuen Slide 33
Common Costs and Segments
Common costs should not be arbitrarily allocated to segments
based on the rationale that someone has to cover the
common costs for two reasons:
1. This practice may make a profitable business segment appear
to be unprofitable.
McGraw-Hill Education (Asia) Garrison, Noreen, Brewer, Cheng & Yuen Slide 34
Quick Check
Income Statement
Hoagland's
Lakeshore Bar Restaurant
Sales $ 800,000 $ 100,000 $ 700,000
Variable costs 310,000 60,000 250,000
CM 490,000 40,000 450,000
Traceable FC 246,000 26,000 220,000
Segment margin 244,000 $ 14,000 $ 230,000
Common costs 200,000
Profit $ 44,000
McGraw-Hill Education (Asia) Garrison, Noreen, Brewer, Cheng & Yuen Slide 36
Quick Check
McGraw-Hill Education (Asia) Garrison, Noreen, Brewer, Cheng & Yuen Slide 37
Quick Check
McGraw-Hill Education (Asia) Garrison, Noreen, Brewer, Cheng & Yuen Slide 38
Quick Check
McGraw-Hill Education (Asia) Garrison, Noreen, Brewer, Cheng & Yuen Slide 39
Quick Check
McGraw-Hill Education (Asia) Garrison, Noreen, Brewer, Cheng & Yuen Slide 40
Allocations of Common Costs
Income Statement
Hoagland's
Lakeshore Bar Restaurant
Sales $ 800,000 $ 100,000 $ 700,000
Variable costs 310,000 60,000 250,000
CM 490,000 40,000 450,000
Traceable FC 246,000 26,000 220,000
Segment margin 244,000 14,000 230,000
Common costs 200,000 20,000 180,000
Profit $ 44,000 $ (6,000) $ 50,000
McGraw-Hill Education (Asia) Garrison, Noreen, Brewer, Cheng & Yuen Slide 42
Quick Check
Should the bar be eliminated?
a. Yes
b. No The profit was $44,000 before
eliminating the bar. If we eliminate
the bar,
Income profit drops to $30,000!
Statement
Hoagland's
Lakeshore Bar Restaurant
Sales $ 700,000 $ 700,000
Variable costs 250,000 250,000
CM 450,000 450,000
Traceable FC 220,000 220,000
Segment margin 230,000 230,000
Common costs 200,000 200,000
Profit $ 30,000 $ 30,000
McGraw-Hill Education (Asia) Garrison, Noreen, Brewer, Cheng & Yuen Slide 43
Learning Objective 2
McGraw-Hill Education (Asia) Garrison, Noreen, Brewer, Cheng & Yuen Slide 44
Return on Investment (ROI) Formula
McGraw-Hill Education (Asia) Garrison, Noreen, Brewer, Cheng & Yuen Slide 45
Net Book Value vs. Gross Cost
Acquisition cost
Less: Accumulated depreciation
Net book value
McGraw-Hill Education (Asia) Garrison, Noreen, Brewer, Cheng & Yuen Slide 46
Understanding ROI
Net operating income
ROI =
Average operating assets
Net operating income
Margin =
Sales
Sales
Turnover =
Average operating assets
McGraw-Hill Education (Asia) Garrison, Noreen, Brewer, Cheng & Yuen Slide 48
Increasing ROI An Example
Regal Company reports the following:
Net operating income $ 30,000
Average operating assets $ 200,000
Sales $ 500,000
Operating expenses $ 470,000
McGraw-Hill Education (Asia) Garrison, Noreen, Brewer, Cheng & Yuen Slide 49
Increasing ROI An Example
McGraw-Hill Education (Asia) Garrison, Noreen, Brewer, Cheng & Yuen Slide 50
Investing in Operating Assets to Increase
Sales
Assume that Regal's manager invests in a $30,000
piece of equipment that increases sales by
$35,000, while increasing operating expenses
by $15,000.
Regal Company reports the following:
Net operating income $ 50,000
Average operating assets $ 230,000
Sales $ 535,000
Operating expenses $ 485,000
ROI = $50,000
$535,000
$535,000 $230,000
McGraw-Hill Education (Asia) Garrison, Noreen, Brewer, Cheng & Yuen Slide 52
Criticisms of ROI
McGraw-Hill Education (Asia) Garrison, Noreen, Brewer, Cheng & Yuen Slide 53
Learning Objective 3
McGraw-Hill Education (Asia) Garrison, Noreen, Brewer, Cheng & Yuen Slide 54
Residual Income - Another Measure of
Performance
McGraw-Hill Education (Asia) Garrison, Noreen, Brewer, Cheng & Yuen Slide 55
Calculating Residual Income
Residual
income
=
Net
operating -
income
( Average
operating
assets
Minimum
required rate of
return
)
This computation differs from ROI.
ROI measures net operating income earned relative
to the investment in average operating assets.
Residual income measures net operating income
earned less the minimum required return on average
operating assets.
McGraw-Hill Education (Asia) Garrison, Noreen, Brewer, Cheng & Yuen Slide 56
Residual Income An Example
McGraw-Hill Education (Asia) Garrison, Noreen, Brewer, Cheng & Yuen Slide 57
Residual Income An Example
McGraw-Hill Education (Asia) Garrison, Noreen, Brewer, Cheng & Yuen Slide 58
Motivation and Residual Income
Residual income encourages managers to
make profitable investments that would
be rejected by managers using ROI.
McGraw-Hill Education (Asia) Garrison, Noreen, Brewer, Cheng & Yuen Slide 59
Quick Check
McGraw-Hill Education (Asia) Garrison, Noreen, Brewer, Cheng & Yuen Slide 60
Quick Check
McGraw-Hill Education (Asia) Garrison, Noreen, Brewer, Cheng & Yuen Slide 61
Quick Check
McGraw-Hill Education (Asia) Garrison, Noreen, Brewer, Cheng & Yuen Slide 62
Quick Check
McGraw-Hill Education (Asia) Garrison, Noreen, Brewer, Cheng & Yuen Slide 63
Quick Check
McGraw-Hill Education (Asia) Garrison, Noreen, Brewer, Cheng & Yuen Slide 64
Quick Check
McGraw-Hill Education (Asia) Garrison, Noreen, Brewer, Cheng & Yuen Slide 65
Quick Check
McGraw-Hill Education (Asia) Garrison, Noreen, Brewer, Cheng & Yuen Slide 66
Quick Check
McGraw-Hill Education (Asia) Garrison, Noreen, Brewer, Cheng & Yuen Slide 67
Quick Check
McGraw-Hill Education (Asia) Garrison, Noreen, Brewer, Cheng & Yuen Slide 68
Quick Check
McGraw-Hill Education (Asia) Garrison, Noreen, Brewer, Cheng & Yuen Slide 69
Divisional Comparisons and Residual
Income
The residual
income approach
has one major
disadvantage.
It cannot be used
to compare the
performance of
divisions of
different sizes.
McGraw-Hill Education (Asia) Garrison, Noreen, Brewer, Cheng & Yuen Slide 70
Zephyr, Inc. - Continued
Recall the following Assume the following
information for the Retail information for the Wholesale
Division of Zephyr, Inc. Division of Zephyr, Inc.
Retail Wholesale
Operating assets $ 100,000 $ 1,000,000
Required rate of return 20% 20%
Minimum required return $ 20,000 $ 200,000
Retail Wholesale
Actual income $ 30,000 $ 220,000
Minimum required return (20,000) (200,000)
Residual income $ 10,000 $ 20,000
McGraw-Hill Education (Asia) Garrison, Noreen, Brewer, Cheng & Yuen Slide 71
Zephyr, Inc. - Continued
The residual income numbers suggest that the Wholesale Division outperformed
the Retail Division because its residual income is $10,000 higher. However, the
Retail Division earned an ROI of 30% compared to an ROI of 22% for the
Wholesale Division. The Wholesale Divisions residual income is larger than the
Retail Division simply because it is a bigger division.
Retail Wholesale
Operating assets $ 100,000 $ 1,000,000
Required rate of return 20% 20%
Minimum required return $ 20,000 $ 200,000
Retail Wholesale
Actual income $ 30,000 $ 220,000
Minimum required return (20,000) (200,000)
Residual income $ 10,000 $ 20,000
McGraw-Hill Education (Asia) Garrison, Noreen, Brewer, Cheng & Yuen Slide 72
Learning Objective 4
McGraw-Hill Education (Asia) Garrison, Noreen, Brewer, Cheng & Yuen Slide 73
The Balanced Scorecard
Financial Customers
Performance
measures
Internal Learning
business and growth
processes
McGraw-Hill Education (Asia) Garrison, Noreen, Brewer, Cheng & Yuen Slide 74
The Balanced Scorecard: From
Strategy to Performance Measures
Performance Measures
Financial What are our
Has our financial financial goals?
performance improved?
McGraw-Hill Education (Asia) Garrison, Noreen, Brewer, Cheng & Yuen Slide 78
The Balanced Scorecard and Compensation
Incentive compensation should be linked to
balanced scorecard performance
measures.
McGraw-Hill Education (Asia) Garrison, Noreen, Brewer, Cheng & Yuen Slide 79
The Balanced Scorecard Jaguar Example
Profit
Financial
Contribution per car
Internal
Business Number of Time to
options available install option
Processes
Customer satisfaction
with options Satisfaction
Increases
Number of Time to
options available install option
Employee skills in
installing options
McGraw-Hill Education (Asia) Garrison, Noreen, Brewer, Cheng & Yuen Slide 82
The Balanced Scorecard Jaguar Example
Profit
Results
Contribution per car Contribution
Increases
Customer satisfaction
with options Satisfaction
Increases
Number of Time to
options available install option Time
Decreases
Employee skills in
installing options
McGraw-Hill Education (Asia) Garrison, Noreen, Brewer, Cheng & Yuen Slide 83
The Balanced Scorecard Jaguar Example
Results
Profit Profits
Increase
If number
Contribution per car Contribution
of cars sold Increases
and contribution
Cars Sold
per car increase, Number of cars sold
Increases
profits
increase. Customer satisfaction
with options
Number of Time to
options available install option
Employee skills in
installing options
McGraw-Hill Education (Asia) Garrison, Noreen, Brewer, Cheng & Yuen Slide 84
Key Performance Indicators for a Balanced
Scorecard
McGraw-Hill Education (Asia) Garrison, Noreen, Brewer, Cheng & Yuen Slide 85
Summary of the Measures and Their Purposes
Internal
Business Learning &
Financial Customer Process Growth
Performance Measures F1 F2 C1 C2 IBP1 IBP2 LG1 LG2
Objectives / Critical Success Factors
& Vision
Missions
Employee Satisfaction **
Customer Satisfaction **
Innovative Products **
Management
Principles
Profitable Growth
Focus on delivery of quality
products to valued customers
Responsibilities to Society
Quality
Critical
Factors
Response Time
Cost
Divisions
Objective
Sales Growth **
McGraw-Hill Education (Asia) Garrison, Noreen, Brewer, Cheng & Yuen Slide 87
Transfer Pricing
Appendix 13A
McGraw-Hill Education (Asia) Garrison, Noreen, Brewer, Cheng & Yuen Slide 89
Three Primary Approaches
McGraw-Hill Education (Asia) Garrison, Noreen, Brewer, Cheng & Yuen Slide 90
Learning Objective 5
McGraw-Hill Education (Asia) Garrison, Noreen, Brewer, Cheng & Yuen Slide 91
Negotiated Transfer Prices
McGraw-Hill Education (Asia) Garrison, Noreen, Brewer, Cheng & Yuen Slide 92
Grocery Storehouse An Example
McGraw-Hill Education (Asia) Garrison, Noreen, Brewer, Cheng & Yuen Slide 93
Grocery Storehouse An Example
The selling divisions (West Coast Plantations) lowest acceptable transfer
price is calculated as:
Variable cost Total contribution margin on lost sales
Transfer Price +
per unit Number of units transferred
McGraw-Hill Education (Asia) Garrison, Noreen, Brewer, Cheng & Yuen Slide 94
Grocery Storehouse An Example
If West Coast Plantations has sufficient idle capacity (3,000 crates) to
satisfy Grocery Marts demands (1,000 crates), without sacrificing
sales to other customers, then the lowest and highest possible
transfer prices are computed as follows:
Selling divisions lowest possible transfer price:
$ -
Transfer Price $10 + = $ 10
1,000
Buying divisions highest possible transfer price:
Transfer Price Cost of buying from outside supplier = $ 20
McGraw-Hill Education (Asia) Garrison, Noreen, Brewer, Cheng & Yuen Slide 98
Transfers at the Cost to the Selling Division
McGraw-Hill Education (Asia) Garrison, Noreen, Brewer, Cheng & Yuen Slide 99
Transfers at Market Price
McGraw-Hill Education (Asia) Garrison, Noreen, Brewer, Cheng & Yuen Slide 100
Divisional Autonomy and Suboptimization
The principles of
decentralization suggest
that companies should
grant managers autonomy
to set transfer prices and
to decide whether to sell
internally or externally,
even if this may
occasionally result in
suboptimal decisions.
This way top management
allows subordinates to
control their own destiny.
McGraw-Hill Education (Asia) Garrison, Noreen, Brewer, Cheng & Yuen Slide 101
End of Chapter 13
McGraw-Hill Education (Asia) Garrison, Noreen, Brewer, Cheng & Yuen Slide 102