MANAGEMENT ACCOUNTING - Solutions Manual CHAPTER 21 DECENTRALIZED OPERATIONS AND SEGMENT REPORTING I Questions 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 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 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 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 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 21-1 Chapter 21 Decentralized Operations and Segment Reporting 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 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 (Working with a Segmented Income Statement) Requirement 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 a The segmented income statement follows: Segments 21-2 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% 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 (Segmented Income Statement) Requirement 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 Incremental sales (P600,000 × 15%) P90,000 Contribution margin ratio × 70% 21-3 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 (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 B C B B B 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 .. .Chapter 21 Decentralized Operations and Segment Reporting Under the contribution approach, costs are assigned to a segment if and only if the costs are traceable... fixed Requirement a The segmented income statement follows: Segments 21- 2 Decentralized Operations and Segment Reporting Chapter 21 Total Company Manila Cebu Amount % Amount % Amount % Sales ... (P600,000 × 15%) P90,000 Contribution margin ratio × 70% 21- 3 Chapter 21 Decentralized Operations and Segment Reporting Incremental contribution margin 63,000 Less