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Chapter 09

Decentralization: Segmented Reporting and Performance Evaluation. Chapter 09. Next Topics (10-14) Next Week Introduction, Main , Conclusion, References Min 6, maks 10 page 1.5 space, 12 font Random Presentation. Paper. Describe centralized and decentralized management styles.

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Chapter 09

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  1. Decentralization: Segmented Reporting and Performance Evaluation Chapter 09

  2. Next Topics (10-14) Next Week Introduction, Main , Conclusion, References Min 6, maks 10 page 1.5 space, 12 font Random Presentation Paper

  3. Describe centralized and decentralized management styles. Learning Objective 1

  4. Organizational Structure

  5. Centralized Management Top management makes most of the decisions. Advantage The most experienced managers are making the important decisions.

  6. Centralized Management Top managers spend their time making routine decisions. 1 Top managers may not be familiar with the routine aspects of the business. 2 Little opportunity for lower-level employees to gain experience. 3 Disadvantages

  7. Decentralized Management Lower-level managers are responsible for management decisions that relate to their segment of the business. Decentralization is the delegation of decision-making authority throughout an organization.

  8. Decentralized Management Advantages Spreads the decision-making responsibilities. Provides an opportunity for lower-level managers to sharpen their decision-making skills. Decisions are made by managers most familiar with the problems. Allows top management to focus on strategic decisions.

  9. Decentralized Management Disadvantages Decisions may not entirely reflect the view of top managers. Decisions are made by less experienced managers.

  10. Reasons for Decentralization There are many reasons to explain why firms decide to decentralize, including: 1. Utilization of local information 2. Strategic focus of central management 3. Training and motivational opportunities for managers 4. Enhanced competition among divisions

  11. Decentralization: The Major Issues The degree of decentralization Performance measurement Management compensation The setting of transfer prices

  12. Describe the different types of business segments and the problems associated with determining segments costs. Learning Objective 2

  13. Business Segments A business segment represents a part of a company managed by a particular individual... or a part of a company about which separate information is needed.

  14. Segment Reports Managers need information that relates to their business segment. Reports that provide information pertaining to a particular business segment are called segment reports.

  15. Prepare a segment income statement. Learning Objective 3

  16. The SegmentIncome Statement An income statement prepared for one segment of a business is called a segment income statement. Functional Format Contribution Income Format

  17. The SegmentIncome Statement QUINTANA COMPANY MIAMI OFFICE Segment Income Statement For the Year Ended December 31, 2004 Sales $1,200,000 Variable cost 800,000 Contribution margin $ 400,000 Fixed cost for Miami office 300,000 Segment margin $ 100,000

  18. Identifying Segment Costs By definition, variable costs are “caused” by some sort of activity or volume. If that activity or volume is related to a particular segment, then so is the variable cost. Fixed costs are more difficult to trace.

  19. Identifying Segment Costs Fixed costs that arise to support a single segment are called direct (or traceable) fixed costs. Fixed costs that are related to more than one segment are common (or indirect) fixed costs.

  20. Flandro Feed Stores Segment Income Statement For the Year Ended December 31, 2005 Company Total North Store South Store Central Store Sales Variable cost Contribution margin Direct fixed cost Segment margin Common fixed cost Net income $500,000 332,950 $167,050 75,000 $ 92,050 60,000 $ 32,050 $105,000 73,750 $ 31,250 20,000 $ 11,250 12,6001 $ (1,350) $225,000 141,000 $ 84,000 32,000 $ 52,000 27,0002 $ 25,000 $170,000 118,200 $ 51,800 23,000 $ 28,800 20,4003 $ 8,400 1$105,000 ÷ $500,000 = 21% × $60,000 = $12,600 2$225,000 ÷ $500,000 = 45% × $60,000 = $27,000 3$170,000 ÷ $500,000 = 34% × $60,000 = $20,400 Allocation based on segment's sales

  21. Flandro Feed StoresWith North Store Eliminated Segment Income Statement For the Year Ended December 31, 2005 Company Total North Store South Store Central Store Sales Variable cost Contribution margin Direct fixed cost Segment margin Common fixed cost Net income $395,000 259,200 $138,800 55,000 $ 80,800 60,000 $ 20,800 $225,000 141,000 $ 84,000 32,000 $ 52,000 34,2002 $ 17,800 $170,000 118,200 $ 51,800 23,000 $ 28,800 25,8003 $ 3,000 2$225,000 ÷ $395,000 = 57% × $60,000 = $34,200 3$170,000 ÷ $395,000 = 43% × $60,000 = $25,800

  22. Flandro Feed Stores Without Allocation of Common Fixed Cost Segment Income Statement For the Year Ended December 31, 2005 Company Total North Store South Store Central Store Sales Variable cost Contribution margin Direct fixed cost Segment margin Common fixed cost Net income $500,000 332,950 $167,050 75,000 $ 92,050 60,000 $ 32,050 $105,000 73,750 $ 31,250 20,000 $ 11,250 $225,000 141,000 $ 84,000 32,000 $ 52,000 $170,000 118,200 $ 51,800 23,000 $ 28,800

  23. Allocating ServiceDepartment Cost Service Department Possible Allocation Basis Personnel Dept. Number of employees Cafeteria Number of employees Number of meals served Finance Dept. Capital invested Computer Operations Computer mainframe time No. of personal computers Maintenance Sq. ft. of building occupied Hours of maintenance

  24. Activity-Based Allocation This cost allocation method tends to be more fair and accurate. Managers will work to reduce the allocation base.

  25. Evaluating Business Segments Revenue centers Cost centers Profit centers Investment centers

  26. Define Cost Center Manager has control over and is held accountable forcosts.

  27. Manager has control over and is held accountable for bothcosts and revenues. Define Profit Center

  28. Manager has control over and is held accountable forcosts, revenues, and assets. Define Investment Center

  29. Evaluating Cost, Revenue and Profit Center/Users/ella/Documents/ZaSiDa/lectures/akmen/Tazkia_2010/akmen09-evaluating responsibility centre.ppt Learning Objective 4

  30. Evaluating Investment Centre /Users/ella/Documents/ZaSiDa/lectures/akmen/Tazkia_2010/akmen09-EVA.ppt Learning Objective 5

  31. Describe the balanced scorecard and the importance of nonfinancial performance measures. Learning Objective 6

  32. Four BalancedScorecard Perspectives Financial Perspective Customer Perspective Internal Processes Perspective Strategy Innovation Perspective

  33. Four BalancedScorecard Perspectives Financial To succeed financially • Operating income • ROI • EVA • Sales growth • Cost reductions Customer To achieve our vision of how we should appear to our customers • No. of new customers • Customer retention • Market share • Time to fill orders • Customer satisfaction

  34. Four BalancedScorecard Perspectives Innovation and Learning To sustain our ability to change and improve. • Employee retention • Employee productivity • Training • Reskilling • Suggestion system Internal To excel at having superior business processes to satisfy our shareholders and customers • Process quality measures • Lead time • Defect rates • Scrap measures

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