MANAGEMENT ACCOUNTING - Solutions Manual
CHAPTER 21 DECENTRA DECENTRALIZ LIZED ED OPERATIONS OPERATIONS AND SEGMENT REPORTIN REPORTING G
I.
Questions
1.
Dece Decent ntral raliz izati ation on means eans that that deci decisi sion on making making in an organ organiza izatio tion n isn’ isn’tt confined to a few top executives, but rather is spread throughout the organiz organizatio ation n with with manager managerss 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%lev lower%level el 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 underst understood ood&& and #*$ a more more effect effective ive basis for measuri measuring ng manager managerial ial performance performance through through the creation of profit and investmen investmentt centers. centers.
'. !he !he thre threee busi busine ness ss prac practi tice cess are are #a$ #a$ omis omissi sion on of some some costs costs 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 deducti deducting ng variable variable expenses expenses.. !he segment segment margin margin represen represents ts the margin margin still still remaini remaining ng after deduct deducting ing traceable traceable fixed fixed expens expenses es from the contributi contribution on 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 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 segmen segmentt performance. performance. ne concept concept is no more useful to management than the other& the two concepts simply relate to different planning horizons. *. - segm segmen entt is any part or activi activity ty of an organ organiz izat atio ion n abou aboutt whic which h 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
Chapt! 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 P!o"l# 1 $%o!&in' (ith a S'#nt) In*o# Stat#nt+
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 Operations and Segment Reporting Chapt! 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. P!o"l# 2 $S'#nt) In*o# Stat#nt+
Requirement 1
:ales
Total Com pany Amount % 41,*55,555 155.5 *; ;, 555 '=. =1,555 /5.; 225,555 *1.' 1),555
=.*
12*, 555 4 #'',555$
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;5,55 5 '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$.................................................... ontribution margin ratio..................................................................... Incremental contribution margin...........................................................
4=5,555 6 257 /',555 *,555 4';,555
Chapt! 21 Decentralized Operations and Segment Reporting
Aes, the advertising program should be initiated. P!o"l# , $asi* S'#nt) In*o# Stat#nt+
:ales?......................................................... Bariable expenses??.................................... ontribution margin.................................... !raceable fixed expenses............................. 4roduct line segment margin....................... ommon fixed expenses not traceable to products.................. ................................ >et operating income............... ...................
Total C! !"! 42*5,555 4'55,555 4)*5,555 )'*,555 15,555 '1*,555 '1*,555 1;5,555 1'*,555 1;',555 1';,555 )*,555 4 ),555 1',555 4 =5,555 15*,555 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
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