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CHAPTER 20
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.
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 dont 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.
21-1
Requirement 2
a. The segmented income statement follows:
Segments
Total Company
21-2
Manila
Cebu
%
Amount
%
Amount
%
100.0% P200,000 100% P600,000 100%
52.5
60,000 30
360,000 60
47.5
140,000 70
240,000 40
21.0
26.5
78,000
P 62,000
39
90,000
31% P150,000
15
25%
15.0
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
West
Amount
%
Amount
P600,000 100 P500,000
180,000 30
200,000
420,000 70
300,000
330,000 55
200,000
15
P100,000
%
100
40
60
40
20
Requirement 2
Incremental sales (P600,000 15%).......................................................................
P90,000
Contribution margin ratio........................................................................................
70%
Incremental contribution margin..............................................................................
63,000
Less incremental advertising expense.......................................................................
25,000
21-3
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
P42,000
DVD
P450,000
315,000
135,000
45,000
P90,000