MANAGEMENT ACCOUNTING - Solutions Manual
CHAPTER 21 DECENTRALIZED OPERATIONS OPERATIONS AND SEGMENT REPORTING
I.
Questions
1.
Decent Decentraliz ralizatio ation n means means that decisi decision on making making in an organiz organizatio ation n isn’t isn’t confined to a few top executives, but rather is spread throughout the organi organizati zation on with with manage managers rs at various various levels levels making making key operatin operating g decisions relating to their sphere of responsibility.
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!he benefit benefitss include" include" #1$ a spreadin spreading g of decisi decision on%m %maki aking ng respons responsibi ibility lity among managers, thereby relieving relieving top managemen managementt from day%to%day problem solving solving and allowing allowing them to focus their time on long%range long%range planning& planning& #$ training in decision decision making making for lower%l lower%level evel managers, managers, thereby preparing them to assume greater responsibility& #'$ greater (ob satisfaction and greater incentive for lower%level managers& #)$ better decisions, since decisions are made at the level where the problem is best understood& understood& and #*$ a more effective effective basis for measuring measuring managerial performance performance through through the creation of profit and investmen investmentt centers. centers.
'. !he !he thre threee busi busine ness ss practi practice cess are are #a$ #a$ omis omissi sion on of some some cost costss in the assignment process, #b$ the use of inappropriate allocation methods, and #c$ allocation of common costs to segments. ). !he !he cont contri ribu buti tion on marg margin in repr repres esen ents ts the the port portio ion n of sale saless reve revenu nuee remain remaining ing after deducting deducting variable variable expenses. expenses. !he segment segment margin margin represen represents ts the margin margin still still remaini remaining ng after deducti deducting ng traceable traceable fixed fixed expens expenses es from the contributio contribution n margin. margin. +eneral +enerally ly speaking speaking,, the contribution margin is most useful as a planning tool in the short run, when fixed costs don’t change. !he segment segment margin is most useful as a planning planning tool tool in the long long run, when fixed costs costs will be changin changing, g, and as a tool for evaluating evaluating long%run long%run segment segment performance. performance. ne concept concept is no more useful to management than the other& the two concepts simply relate to different planning horizons. *. - segm segmeent is any part part or activ activit ity y of an orga organi niza zati tion on about about which hich a manage managerr seeks seeks cost, cost, revenu revenue, e, or profit profit data. xampl xamples es of segme segments nts include departments, operations, sales territories, divisions, product lines, and so forth.
21-1
Chapter 21 Decentralized Operations and Segment Reporting
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0nder 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$. ommon costs are not allocated to segments under the contribution approach.
2.
- traceable cost of a segment is a cost that arises specifically because of the existence of that segment. If the segment were eliminated, the cost would disappear. - common cost, by contrast, is a cost that supports more than one segment, but is not traceable in whole or in part to any one of the segments. If the departments of a company are treated as segments, then examples of the traceable costs of a department would include the salary of the department’s supervisor, depreciation of machines used exclusively by the department, and the costs of supplies used by the department. xamples of common costs would include the salary of the general counsel of the entire company, the lease cost of the head3uarters building, corporate image advertising, and periodic depreciation of machines shared by several departments.
II. Problems Problem 1 (or!in" #ith a Se"mente$ In%ome Statement&
Requirement 1 42*,555 6 )57 8 ratio 9 4'5,555 increased contribution margin in ebu. :ince the fixed costs in the office and in the company as a whole will not change, the entire 4'5,555 would result in increased net operating income for the company. It is incorrect to multiply the 42*,555 increase in sales by ebu’s *7 segment margin ratio. !his approach assumes that the segment’s traceable fixed expenses increase in proportion to sales, but if they did, they would not be fixed.
Requirement 2 a. !he segmented income statement follows" Segments Total Company 21-2
Manila
Cebu
Decentralized Operati ons and Segment Reporting Chapter 21
Amount :ales............................................. 4;55,555 et operating income.................. 4 =,555
% Amount % Amount % 155.57 455,555 1557 4/55,555 1557 *.* /5,555 '5 '/5,555 /5 )2.* 1)5,555 25 )5,555 )5 1.5 /.*
2;,555 4 /,555
'= =5,555 '17 41*5,555
1* *7
1*.5 11.*7
b. !he segment margin ratio rises and falls as sales rise and fall due to the presence of fixed costs. !he 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 (Se"mente$ In%ome Statement&
Requirement 1
:ales
Total Com pany Amount % 41,*55,555 155.5 *;;,555 '=. =1,555 /5.; 225,555 *1.' 1),555
=.*
12*,555 4 #'',555$
11.2 #.$
East Amount % 4)55,555 155 5;,555 * 1=,555 ); )5,555 /5
Geographic Market Central est Amount % Amount % 4/55,555 155 4*55,555 155 1;5,555 '5 55,555 )5 )5,555 25 '55,555 /5 ''5,555 ** 55,555 )5
4#);,555 $ #1$ 4 =5,555
1*
4155,555
5
et operating income #loss$ ? 4=)*,555 @ 4225,555 9 412*,555.
Requirement 2 Incremental sales #4/55,555 6 1*7$....................................................................... 4=5,555 ontribution margin ratio........................................................................................ 6 257 Incremental contribution margin.............................................................................. /',555
Chapter 21 Decentralized Operations and Segment Reporting
Incremental net operating income............................................................................ 4';,555 Aes, the advertising program should be initiated. Problem ' (asi% Se"mente$ In%ome Statement&
Total :ales?........................................................................... 42*5,555 . Bariable expenses??....................................................... )'*,555 ontribution margin....................................................... '1*,555 !raceable fixed expenses............................................... 1;',555 4roduct line segment margin.......................................... 1',555 ommon fixed expenses not traceable to products.................. ................................................... 15*,555 >et operating income..................................................... 4 2,555 ? D" '2,*55 packs 6 4;.55 per pack 9 4'55,555& DBD" 1;,555 packs 6 4*.55 per pack9 4)*5,555. ?? D" '2,*55 packs 6 4'.5 per pack 9 415,555& DBD" 1;,555 packs 6 412.*5 per pack9 4'1*,555. III. Multiple Choice Questions 1. . '. ). *.
C C C C
/. 2. ;. =. 15.
C D
11. 1. C
21-)
C! 4'55,555 15,555 1;5,555 1';,555 4 ),555
!"! 4)*5,555 '1*,555 1'*,555 )*,555 4 =5,555