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Accounting 3020

Accounting 3020. Chapter 12 – Segment Reporting, Decentralization, and Balanced Scorecard. Decentralization. Decision making is spread throughout the organization, not all made by top management Advantages Empowers managers to make decisions

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Accounting 3020

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  1. Accounting 3020 Chapter 12 – Segment Reporting, Decentralization, and Balanced Scorecard

  2. Decentralization • Decision making is spread throughout the organization, not all made by top management • Advantages • Empowers managers to make decisions • Middle managers have more knowledge about day to day activities • Disadvantages • It gives a lot of responsibility to managers who may be inexperienced • Divisions may not work toward the good of the overall company – may promote only their own division

  3. Segments • Segment – part or division of a company • Can be break the company into parts • By product • By function – sales, marketing, production, accounting • By customer – industrial group, nonprofit clients, schools, hospitals, etc. • By geographic region – U.S., Europe, Asia, etc.

  4. Responsibility Accounting • Organizational Structure and Responsibility • Have segments account only for items they can control - controllability • Cost center (just costs) • Revenue center (just revenues) • Profit center (both revenues and costs) • Investment center (assets, revenues and costs)

  5. Responsibility Accounting • Evaluation • Cost center – variance analysis • Revenue center – variance analysis • Profit center – segmental profitability • Investment center – return on investment and residual income

  6. Segmental Reporting • Segmental reporting for profit centers • Contribution margin format • Sales, variable costs, contribution margin • Fixed costs broken down into • Traceable fixed costs • Common fixed costs • Traceable and common fixed costs vary by segments • Higher up the organization, the more traceable costs you have • Segment margin is the final subtotal on which to be evaluated

  7. Segmental Reporting • Hindrances to Proper Cost Assignment • Improper allocation of common costs • Based on sales, equally assigned, by activity based costing • Method of assignment could cause behavioral problems

  8. Investment Centers • Performance Measures • Return on Investment • Net operating income/Average operating assets • ROI = Profit Margin x Asset turnover • ROI = Net operating income/Sales x Sales/Average operating assets • Is often used with the balanced scorecard • Problems of manipulation

  9. Investment Centers • Performance Measures • Residual Income • Net operating income - % minimum return on average operating assets • Dollar figure developed to compare to other divisions and companies • Allows firms to invest in projects that are below their ROI

  10. Balanced Scorecard Information system for employees for all levels of the organization Translation of a business unit’s mission and strategy into tangible goals and measures. Balanced scorecards focus on continuous improvement Four Different Perspectives Financial Customer Internal Business Process Learning and growth

  11. Performance Measures Critical Financial Performance Measures Operating profit Return on Investment Return on Equity Return on Capital Employed Economic Value Added Critical Customer Performance Measures Customer satisfaction Customer retention New customer acquisition Customer profitability

  12. Performance Measures Internal Business Process Performance Measures Innovation Processes Quality measures Cycle time measures Delivery cycle times Throughput time - time to manufacture Manufacturing Cycle Efficiency = Process time/Throughput time (Goal = 100%) Cost measures Post-Sale Service Processes

  13. Performance Measures Learning and Growth Performance Measures People Systems Organizational Procedures Balanced Scorecard measures should be measured in a timely fashion!!!!

  14. Transfer Prices • Definition – price charged between two divisions of the same company • Theoretical price: Costs incurred + lost contribution margin • Perfect market conditions • Market price charged if producing at full capacity • Variable costs charged if producing at less than full capacity • Real world: Price somewhere between the two • Negotiated price

  15. Transfer Prices • Methods used in practice • Negotiated transfer prices • Cost-based prices • At least variable costs charged (Variable cost) • Often some portion of fixed costs is charged (Termed full cost) • Sometimes a profit margin is added to the above costs • Market-based prices • Divisional autonomy and suboptimization

  16. Transfer Pricing • International Complications • Taxes • Competition • Import duties • National controls (currency rationing, limits on amount of cash taken out of country) • Profitability of subsidiary

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