MANAGEMENT ACCOUNTING - Solutions Manual

CHAPTER 21
DECENTRALIZED OPERATIONS AND
SEGMENT REPORTING
I. Questions
1. Decentralization means that decision making in an organization isnt
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.
. !he 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& #$ training in decision making for lower%level 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
understood& and #*$ a more effective basis for measuring managerial
performance through the creation of profit and investment centers.
'. !he 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.
). !he contribution margin represents the portion of sales revenue
remaining after deducting variable expenses. !he segment margin
represents the margin still remaining after deducting traceable fixed
expenses from the contribution margin. +enerally speaking, the
contribution margin is most useful as a planning tool in the short run,
when fixed costs dont change. !he 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. ,ne concept is no
more useful to management than the other& the two concepts simply relate
to different planning horizons.
*. - segment is any part or activity of an organization about which a
manager seeks cost, revenue, or profit data. .xamples of segments
include departments, operations, sales territories, divisions, product lines,
and so forth.
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Chapt! 21 Decentralized Operations and Segment Reporting
/. 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$. 1ommon 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 departments 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 18 ratio 9 4'5,555 increased contribution margin in 1ebu.
: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 1ebus *7
segment margin ratio. !his approach assumes that the segments 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 Manila Cebu
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Decentralized Operations and Segment Reporting Chapt! 21
Amount % Amount % Amount %
:ales..................................... 4;55,555 155.57 455,555 1557 4/55,555 1557
<ess variable expenses........ )5,555 *.* /5,555 '5 '/5,555 /5
1ontribution margin............ ';5,555 )2.* 1)5,555 25 )5,555 )5
<ess traceable fixed
expenses........................... 1/;,555 1.5 2;,555 '= =5,555 1*
,ffice segment margin........ 1,555 /.* 4 /,555 '17 41*5,555 *7
<ess common fixed
expenses not traceable to
segments.......................... 15,555 1*.5
>et operating income.......... 4 =,555 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 $S'#nt) In*o# Stat#nt+
Requirement 1
Geographic Market
Total Company East Central est
Amount % Amount % Amount % Amount %
:ales 41,*55,555 155.5 4)55,555 155 4/55,555 155 4*55,555 155
<ess variable expenses *;;,555 '=. 5;,555 * 1;5,555 '5 55,555 )5
1ontribution margin =1,555 /5.; 1=,555 ); )5,555 25 '55,555 /5
<ess traceable fixed expenses 225,555 *1.' )5,555 /5 ''5,555 ** 55,555 )5
+eographic market segment margin
1),555 =.* 4#);,555$ #1$ 4 =5,555 1* 4155,555 5
<ess common fixed expenses not
traceable to geographic markets?
12*,555 11.2
>et operating income #loss$ 4 #'',555 $ #.$
? 4=)*,555 @ 4225,555 9 412*,555.
Requirement 2
Incremental sales #4/55,555 6 1*7$.................................................... 4=5,555
1ontribution margin ratio..................................................................... 6 257
Incremental contribution margin........................................................... /',555
<ess incremental advertising expense................................................... *,555
Incremental net operating income......................................................... 4';,555
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Chapt! 21 Decentralized Operations and Segment Reporting
Aes, the advertising program should be initiated.
P!o"l# , $-asi* S'#nt) In*o# Stat#nt+
Total C! !"!
:ales?......................................................... 42*5,555 4'55,555 4)*5,555
Bariable expenses??.................................... )'*,555 15,555 '1*,555
1ontribution margin.................................... '1*,555 1;5,555 1'*,555
!raceable fixed expenses............................. 1;',555 1';,555 )*,555
4roduct line segment margin....................... 1',555 4 ),555 4 =5,555
1ommon fixed expenses not traceable to
products.................................................. 15*,555
>et operating income.................................. 4 2,555
?
??
1D" '2,*55 packs 6 4;.55 per pack 9 4'55,555&
DBD" 1;,555 packs 6 4*.55 per pack9 4)*5,555.
1D" '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 /. - 11. -
. 1 2. 1 1. C
'. C ;. C
). C =. D
*. C 15. 1
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