Manerial accounting 11e garrison noreen brewer chap012

11th Edition
Chapter 12

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Segment Reporting and
Decentralization
Chapter Twelve

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Decentralization in Organizations
Benefits of
Decentralization

Top
Top management
management
freed
freed to
to concentrate
concentrate
on
on strategy.
strategy.

Lower-level
Lower-level managers
managers
gain
gain experience
experience in
in
decision-making.
decision-making.
Decision-making
Decision-making
authority
authority leads
leads to
to
job
job satisfaction.
satisfaction.
Lower-level
decision
Lower-level decision
often
often based
based on
on
better
better information.
information.
Lower

Lower level
level managers
managers
can
can respond
respond quickly
quickly
to
to customers.
customers.
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Decentralization in Organizations

Lower-level
Lower-level managers
managers
may
may make
make decisions
decisions
without
without seeing
seeing the
the
“big
“big picture.”

picture.”
Lower-level
Lower-level manager’s
manager’s
objectives
objectives may
may not
not
be
be those
those of
of the
the
organization.
organization.

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May
May be
be aa lack
lack of
of
coordination
coordination among
among
autonomous
autonomous
managers.
managers.

Disadvantages of
Decentralization
May
May be
be difficult
difficult to
to
spread
spread innovative
innovative ideas
ideas
in
in the
the organization.
organization.
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Cost, Profit, and Investments Centers

Cost
Cost
Center
Center

Cost, profit,
and investment
centers are all
known as

responsibility
centers.
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Profit
Profit
Center
Center

Investment
Investment
Center
Center

Responsibility
Responsibility
Center
Center
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Cost, Profit, and Investments Centers

Cost Center
A segment whose
manager has control
over costs,
but not over revenues
or investment funds.

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Cost, Profit, and Investments Centers

Profit Center
A segment whose
manager has control
over both costs and
revenues,
but no control over
investment funds.

Revenues
Sales
Interest
Other

Costs
Mfg. costs
Commissions
Salaries
Other

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Cost, Profit, and Investments Centers

Corporate Headquarters

Investment Center
A segment whose
manager has control
over costs, revenues,
and investments in
operating assets.

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Responsibility Centers
Investment
Centers
O p e r a tio n s
V ic e P r e s id e n t
S a lty S n a c k s
P ro d u c t M a n g e r
B o ttlin g P la n t
M anager

B e v e ra g e s
P ro d u c t M a n a g er
W a re h o u se

M anager

S u p e r io r F o o d s C o r p o r a tio n
C o rp o ra te H e a d q u a rte rs
P r e s id e n t a n d C E O
F in a n c e
C h ie f F In a n c ia l O ffic e r

Legal
G e n e ra l C o u n s e l

P e rs o n n e l
V ic e P r e s id e n t

C o n fe c tio n s
P ro d u c t M a n a g e r
D is tr ib u tio n
M anager

Cost
Centers

Superior Foods Corporation provides an example of the
various kinds of responsibility centers that exist in an
organization.
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Responsibility Centers
S u p e r io r F o o d s C o r p o r a tio n
C o rp o ra te H e a d q u a rte rs
P r e s id e n t a n d C E O
O p e r a tio n s
V ic e P r e s id e n t
S a lty S n a c k s
P ro d u c t M a n g e r
B o ttlin g P la n t
M anager

B e v e ra g e s
P ro d u c t M a n a g er
W a re h o u se
M anager

F in a n c e
C h ie f F In a n c ia l O ffic e r
C o n fe c tio n s
P ro d u c t M a n a g e r
D is tr ib u tio n
M anager

Legal
G e n e ra l C o u n s e l

P e rs o n n e l
V ic e P r e s id e n t

Profit

Centers

Superior Foods Corporation provides an example of the
various kinds of responsibility centers that exist in an
organization.
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Responsibility Centers
S u p e r io r F o o d s C o r p o r a tio n
C o rp o ra te H e a d q u a rte rs
P r e s id e n t a n d C E O
O p e r a tio n s
V ic e P r e s id e n t
S a lty S n a c k s
P ro d u c t M a n g e r
B o ttlin g P la n t
M anager

B e v e ra g e s
P ro d u c t M a n a g er
W a re h o u se
M anager

F in a n c e
C h ie f F In a n c ia l O ffic e r

Legal

G e n e ra l C o u n s e l

P e rs o n n e l
V ic e P r e s id e n t

C o n fe c tio n s
P ro d u c t M a n a g e r
D is tr ib u tio n
M anager

Cost
Centers

Superior Foods Corporation provides an example of the
various kinds of responsibility centers that exist in an
organization.
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Decentralization and Segment Reporting

A segment is any part
or activity of an
organization about
which a manager
seeks cost, revenue,
or profit data. A
segment can be . . .

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An Individual Store
Quick Mart

A Sales Territory

A Service Center

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Superior Foods: Geographic Regions
S u p e r io r F o o d s C o r p o r a tio n
$ 5 0 0 , 0 0 0 ,0 0 0
E ast
$ 7 5 ,0 0 0 ,0 0 0
O re g o n
$ 4 5 ,0 0 0 ,0 0 0

W est
$ 3 0 0 ,0 0 0 ,0 0 0

W a s h in g to n
$ 5 0 ,0 0 0 ,0 0 0

M id w e s t
$ 5 5 ,0 0 0 ,0 0 0

C a lif o r n ia
$ 1 2 0 , 0 0 0 ,0 0 0

S o u th
$ 7 0 ,0 0 0 ,0 0 0

M o u n t a in S t a t e s
$ 8 5 ,0 0 0 ,0 0 0

Superior Foods Corporation could segment its business
by geographic regions.
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Superior Foods: Customer Channel

S u p e rio r F o o d s C o r p o r a tio n
$ 5 0 0 , 0 0 0 ,0 0 0
C o n v e n ie n c e S to r e s
$ 8 0 ,0 0 0 ,0 0 0
S u p e r m a r k e t C h a in A
$ 8 5 ,0 0 0 ,0 0 0

S u p e r m a r k e t C h a in s
$ 2 8 0 , 0 0 0 ,0 0 0

S u p e r m a r k e t C h a in B
$ 6 5 ,0 0 0 ,0 0 0

W h o l e s a le D is t r ib u t o r s
$ 1 0 0 ,0 0 0 ,0 0 0

S u p e r m a r k e t C h a in C
$ 9 0 ,0 0 0 ,0 0 0

D ru g s to re s
$ 4 0 ,0 0 0 ,0 0 0

S u p e r m a r k e t C h a in D
$ 4 0 ,0 0 0 ,0 0 0

Superior Foods Corporation could segment its business
by customer channel.
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Keys to Segmented Income Statements
There are two keys to building
segmented income statements:
A contribution format should be used because it
separates fixed from variable costs and it
enables the calculation of a contribution margin.

Traceable fixed costs should be separated from
common fixed costs to enable the calculation of
a segment margin.

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Identifying Traceable Fixed Costs
Traceable costs arise because of the existence of a
particular segment and would disappear over time if
the segment itself disappeared.

No computer
division means . . .

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No computer
division manager.

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Identifying Common Fixed Costs
Common costs arise because of the overall
operation of the company and would not disappear
if any particular segment were eliminated.
No computer
division but . . .

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We still have a
company president.

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Traceable Costs Can Become Common
Costs
It is important to realize that the traceable
fixed costs of one segment may be a
common fixed cost of another segment.
For example, the landing fee
paid to land an airplane at an
airport is traceable to the
particular flight, but it is not
traceable to first-class,
business-class, and
economy-class passengers.
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Segment Margin

Profits

The segment margin,
margin which is computed by

subtracting the traceable fixed costs of a
segment from its contribution margin, is the best
gauge of the long-run profitability of a segment.

Time
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Traceable and Common Costs
Fixed
Costs

Traceable

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Don’t allocate
common costs to
segments.
Common

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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
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Levels of Segmented Statements
Webber, Inc. has two divisions.
W e b b e r , In c .

C o m p u te r D iv is io n

T e le v is io n D iv is io n

Let’s
Let’s look
look more
more closely
closely at
at the
the Television
Television
Division’s
Division’s income
income statement.
statement.
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Levels of Segmented Statements
Our approach to segment reporting uses the
contribution format.

Income Statement
Contribution Margin Format
Television Division
Sales
$ 300,000
Variable COGS
120,000
Other variable costs
30,000
Total variable costs
150,000
Contribution margin
150,000
Traceable fixed costs
90,000
Division margin
$ 60,000
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Cost
Cost of
of goods
goods
sold
sold consists
consists of
of
variable
variable
manufacturing

manufacturing
costs.
costs.
Fixed
Fixed and
and
variable
variable costs
costs
are
are listed
listed in
in
separate
separate
sections.
sections.
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Levels of Segmented Statements
Our approach to segment reporting uses the
contribution format.
Income Statement
Contribution Margin Format
Television Division
Sales
$ 300,000
Variable COGS
120,000

Other variable costs
30,000
Total variable costs
150,000
Contribution margin
150,000
Traceable fixed costs
90,000
Division margin
$ 60,000
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Contribution
Contribution margin
margin
is
is computed
computed by
by
taking
taking sales
sales minus
minus
variable
variable costs.
costs.
Segment
Segment margin
margin
is

is Television’s
Television’s
contribution
contribution
to
to profits.
profits.
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Levels of Segmented Statements

Sales
Variable costs
CM
Traceable FC
Division margin
Common costs
Net operating
income

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Income Statement
Company
Television
$ 500,000
$ 300,000
230,000
150,000

270,000
150,000
170,000
90,000
100,000
$ 60,000

Computer
$ 200,000
80,000
120,000
80,000
$ 40,000

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