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PowerPoint Presentation by
Gail B. Wright
Professor Emeritus of Accounting
Bryant University
MANAGEMENT
ACCOUNTING
8th EDITION
BY
HANSEN & MOWEN
10 SEGMENTED REPORTING
1
LEARNING
LEARNING OBJECTIVES
OBJECTIVES
1. Explain how & why firms choose to
decentralize.
2. Explain the difference between absorption
& variable costing, & prepare segmented
income statements.
3. Compute & explain return on investment
(ROI).
Continued
2
LEARNING
LEARNING OBJECTIVES
OBJECTIVES
4. Compute & explain residual income &
economic value added (EVA).
5. Explain the role of transfer pricing in a
decentralized firm.
LO 1
What is a responsibility
accounting system?
A responsibility accounting
system measures the results of
responsibility centers according to
information managers need to
operate their centers.
4
LO 1
REASONS FOR
DECENTRALIZATION
Firms decide to decentralize:
For ease of gathering, using local information
To focus central management
To train & motivate segment managers,
To enhance competition & expose segments to
market forces
LO 1
RESPONSIBILITY
RESPONSIBILITY CENTER:
CENTER:
Definition
Definition
LO 1
RESPONSIBILITY CENTERS
Major types of responsibility centers are:
Cost centers
Manager responsible for cost only
Revenue center
Manager responsible for sales only
Profit center
Manager responsible for sales & costs
Investment center
Manager responsible for sales, costs, & capital
investment
7
LO 2
LO 2
COMPARISON COSTING
METHODS
EXHIBIT 10-4
9
LO 2
INVENTORY
INVENTORY VALUATION:
VALUATION:
Background
Background
0
10,000
8,000
$ 50
Direct labor
100
Variable overhead
50
Fixed costs
Fixed overhead per unit produced
Fixed selling & administrative
25
100,000
10
LO 2
ABSORPTION COSTING
Direct materials
Direct labor
50
100
Variable overhead
50
25
$ 225
LO 2
VARIABLE COSTING
Direct materials
Direct labor
Variable overhead
Unit product cost
50
100
50
$ 200
LO 2
ABSORPTION INCOME
STATEMENT
Sales ($300 x 8,000)
$ 2,400000
1,800,000
Gross margin
$ 600,000
100,000
$ 500,000
CGS =
8,000 x $ 225 = $ 1,800,000
13
LO 2
2,400,000
1,600,000
Contribution margin
800,000
350,000
Operating income
450,000
LO 2
15
LO 2
EXPLANATION
The
The difference
difference between
between variable
variable costing
costing
&
& absorption
absorption costing
costing year
year to
to year
year is
is
equal
equal to
to the
the change
change in
in fixed
fixed overhead.
overhead.
Under
Under absorption
absorption costing,
costing, fixed
fixed
inventory
overhead
overhead is
is assigned
assigned to
to inventory
inventory
produced
produced.
produced. Under
Under variable
variable costing,
costing,
period
expense ..
fixed
fixed overhead
overhead is
is aa period
period expense
expense
16
LO 2
17
LO 2
SEGMENT:
SEGMENT: Definition
Definition
Is a subunit of a company of
sufficient importance to warrant
performance reports.
18
LO 2
DIRECT
DIRECT FIXED
FIXED EXPENSES:
EXPENSES:
Definition
Definition
19
LO 2
COMPARATIVE INCOME
STATEMENTS
Segment margin is
contribution to firms
common fixed costs.
EXHIBIT 10-11
20
LO 3
FORMULA: ROI
ROI relates operating profits to assets
employed.
Operating Income
Average Operating Assets
21
LO 3
What is margin?
What is turnover?
Margin
Margin is the ratio of operating to
sales.
Turnover
Turnover tells how many dollars of
sales results from every dollar of
invested assets.
22
LO 3
ADVANTAGES OF ROI
Encourages managers to focus on
Relationship among sales, expenses (& possibility
investment if this is investment center)
Cost efficiency
Operating asset efficiency
23
LO 4
DISADVANTAGES OF ROI
Can product a narrow focus on divisional
profitability at expense of profitability for
overall firm
Encourages managers to focus on short run at
expense of long run
24
LO 4
RESIDUAL INCOME
Residual income is the difference between
operating income and minimum dollar return
on sales.
Residual Income
= Operating income
(Min. rate of return x Ave. Operating Assets)
= $48,000 (0.12 x $300,000)
= $12,000
25
LO 4
ADVANTAGES &
DISADVANTAGES: Residual Income
Advantage: Gives another view of project
profitability
Disadvantages
Can encourage short run orientation
Direct comparisons are difficult
26
LO 4
27
LO 5
TRANSFER
TRANSFER PRICING:
PRICING: Definition
Definition
28
CHAPTER 10
THE
THE END
END
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