Solution manual managerial accounting concept and applications by cabrera chapter 21 answer

MANAGEMENT ACCOUNTING - Solutions Manual

CHAPTER 21
DECENTRALIZED OPERATIONS AND
SEGMENT REPORTING
I.

Questions
1. Decentralization means that decision making in an organization isn’t
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 don’t 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 department’s 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 Cebu’s 25%
segment margin ratio. This 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. The segmented income statement follows:
Segments
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Decentralized Operations and Segment Reporting Chapter 21
Total Company
Manila
Cebu
Amount
%
Amount
%
Amount
%
Sales...........................................

P800,000 100.0% P200,000 100% P600,000 100%
Less variable expenses...............
420,000
52.5
60,000 30
360,000 60
Contribution margin...................
380,000
47.5
140,000 70
240,000 40
Less traceable fixed
expenses..................................
168,000
21.0
78,000 39
90,000 15
Office segment margin...............
212,000
26.5
P 62,000 31% P150,00 25%
0
Less common fixed
expenses not traceable to
segments.................................
120,000
15.0
Net operating income.................
P 92,000
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
Amount
%
P600,000 100
180,000 30
420,000 70
330,000 55

P(48,000) (12) P 90,000

15

West
Amount
P500,000
200,000
300,000
200,000

%
100
40
60
40

P100,000

20

* P945,000 – P770,000 = P175,000.

Requirement 2
Incremental sales (P600,000 × 15%)........................................................................
P90,000
Contribution margin ratio..........................................................................................
× 70%
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Chapter 21 Decentralized Operations and Segment Reporting

Incremental contribution margin...............................................................................
63,000
Less incremental advertising expense......................................................................
25,000
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.....................................................
P 27,000
* 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
P 42,000

DVD
P450,000
315,000
135,000
45,000
P 90,000