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MANAGEMENT ACCOUNTING - Solutions Manual

CHAPTER 20
DECENTRALIZED OPERATIONS AND
SEGMENT REPORTING
I.

Questions
1. Decentralization means that decision making in an organization isnt
confined to a few top executives, but rather is spread throughout the
organization with managers at various levels making key operating
decisions relating to their sphere of responsibility.
2. The benefits include: (1) a spreading of decision-making responsibility
among managers, thereby relieving top management from day-to-day
problem solving and allowing them to focus their time on long-range
planning; (2) training in decision making for lower-level managers,
thereby preparing them to assume greater responsibility; (3) greater job
satisfaction and greater incentive for lower-level managers; (4) better
decisions, since decisions are made at the level where the problem is best
understood; and (5) a more effective basis for measuring managerial
performance through the creation of profit and investment centers.
3. The three business practices are (a) omission of some costs in the
assignment process, (b) the use of inappropriate allocation methods, and
(c) allocation of common costs to segments.
4. The contribution margin represents the portion of sales revenue
remaining after deducting variable expenses. The segment margin
represents the margin still remaining after deducting traceable fixed
expenses from the contribution margin. Generally speaking, the
contribution margin is most useful as a planning tool in the short run,
when fixed costs dont change. The segment margin is most useful as a
planning tool in the long run, when fixed costs will be changing, and as a
tool for evaluating long-run segment performance. One concept is no
more useful to management than the other; the two concepts simply relate
to different planning horizons.
5. A segment is any part or activity of an organization about which a
manager seeks cost, revenue, or profit data. Examples of segments
include departments, operations, sales territories, divisions, product lines,
and so forth.
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Chapter 21 Decentralized Operations and Segment Reporting

6. Under the contribution approach, costs are assigned to a segment if and


only if the costs are traceable to the segment (i.e., could be avoided if the
segment were eliminated). Common costs are not allocated to segments
under the contribution approach.
7. A traceable cost of a segment is a cost that arises specifically because of
the existence of that segment. If the segment were eliminated, the cost
would disappear. A common cost, by contrast, is a cost that supports
more than one segment, but is not traceable in whole or in part to any one
of the segments. If the departments of a company are treated as
segments, then examples of the traceable costs of a department would
include the salary of the departments supervisor, depreciation of
machines used exclusively by the department, and the costs of supplies
used by the department. Examples of common costs would include the
salary of the general counsel of the entire company, the lease cost of the
headquarters building, corporate image advertising, and periodic
depreciation of machines shared by several departments.
II. Problems
Problem 1 (Working with a Segmented Income Statement)
Requirement 1
P75,000 40% CM ratio = P30,000 increased contribution margin in Cebu.
Since the fixed costs in the office and in the company as a whole will not
change, the entire P30,000 would result in increased net operating income for
the company.
It is incorrect to multiply the P75,000 increase in sales by Cebus 25%
segment margin ratio. This approach assumes that the segments traceable
fixed expenses increase in proportion to sales, but if they did, they would not
be fixed.

Requirement 2
a. The segmented income statement follows:
Segments
Total Company
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Manila

Cebu

Decentralized Operations and Segment Reporting Chapter 21


Amount
Sales.............................................
P800,000
Less variable expenses.................
420,000
Contribution margin....................
380,000
Less traceable fixed
expenses....................................
168,000
Office segment margin.................
212,000
Less common fixed
expenses not traceable to
segments...................................
120,000
Net operating income..................
P 92,000

%
Amount
%
Amount
%
100.0% P200,000 100% P600,000 100%
52.5
60,000 30
360,000 60
47.5
140,000 70
240,000 40
21.0
26.5

78,000
P 62,000

39
90,000
31% P150,000

15
25%

15.0
11.5%

b. The segment margin ratio rises and falls as sales rise and fall due to the
presence of fixed costs. The fixed expenses are spread over a larger base
as sales increase.
In contrast to the segment ratio, the contribution margin ratio is a stable
figure so long as there is no change in either the variable expenses or the
selling price of a unit of service.
Problem 2 (Segmented Income Statement)
Requirement 1

Sales
Less variable expenses
Contribution margin
Less traceable fixed expenses
Geographic market segment margin
Less common fixed expenses not
traceable to geographic markets*
Net operating income (loss)

Total Company
Amount
%
P1,500,000 100.0
588,000
39.2
912,000
60.8
770,000
51.3
142,000

9.5

175,000
P (33,000)

11.7
(2.2)

East
Amount
%
P400,000 100
208,000
52
192,000
48
240,000
60

Geographic Market
Central
West
Amount
%
Amount
P600,000 100 P500,000
180,000 30
200,000
420,000 70
300,000
330,000 55
200,000

P(48,000) (12) P90,000

15

P100,000

%
100
40
60
40
20

* P945,000 P770,000 = P175,000.

Requirement 2
Incremental sales (P600,000 15%).......................................................................
P90,000
Contribution margin ratio........................................................................................
70%
Incremental contribution margin..............................................................................
63,000
Less incremental advertising expense.......................................................................
25,000
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Chapter 21 Decentralized Operations and Segment Reporting

Incremental net operating income............................................................................


P38,000
Yes, the advertising program should be initiated.
Problem 3 (Basic Segmented Income Statement)
Total
Sales*............................................................................
P750,000
Variable expenses**.......................................................
435,000
Contribution margin.......................................................
315,000
Traceable fixed expenses...............................................
183,000
Product line segment margin..........................................
132,000
Common fixed expenses not traceable to
products.....................................................................
105,000
Net operating income.....................................................
P27,000
* CD: 37,500 packs P8.00 per pack = P300,000;
DVD: 18,000 packs P25.00 per pack= P450,000.
** CD: 37,500 packs P3.20 per pack = P120,000;
DVD: 18,000 packs P17.50 per pack= P315,000.
III. Multiple Choice Questions
1.
2.
3.
4.
5.

B
C
B
B
B

6.
7.
8.
9.
10.

A
C
B
D
C

11. A
12. B

21-4

CD
P300,000
120,000
180,000
138,000
P42,000

DVD
P450,000
315,000
135,000
45,000
P90,000