CHAPTER 11
MANAGEMENT ACCOUNTING - Solutions Manual
Chapter 21 Decentralized Operations and Segment
ReportingDecentralized Operations and Segment Reporting Chapter
21
CHAPTER 21
DECENTRALIZED OPERATIONS AND SEGMENT
REPORTINGI.Questions1.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.
6.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.
7.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 departments 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.ProblemsProblem 1 (Working with a Segmented Income
Statement)
Requirement 1
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
Cebus 25% segment margin ratio. This 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.The segmented income statement follows:
Segments
Total CompanyManilaCebu
Amount%Amount%Amount%
Sales
P800,000100.0%P200,000100%P600,000100%
Less variable expenses
420,000 52.5 60,000 30 360,000 60
Contribution margin
380,00047.5140,00070240,00040
Less traceable fixed expenses
168,000 21.0 78,000 39 90,000 15
Office segment margin
212,00026.5P 62,000 31%P150,000 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 2 (Segmented Income Statement)
Requirement 1
Geographic Market
Total CompanyEastCentralWest
Amount%Amount%Amount%Amount%
Sales
P1,500,000100.0P400,000100P600,000100P500,000100
Less variable expenses
588,00039.2208,00052180,00030200,00040
Contribution margin
912,00060.8192,00048420,00070300,00060
Less traceable fixed expenses
770,00051.3240,00060 330,00055 200,00040
Geographic market segment margin
142,0009.5P(48,000)(12)P90,00015P100,00020
Less common fixed expenses not traceable to geographic
markets*
175,00011.7
Net operating income (loss)
P (33,000)(2.2)
* P945,000 P770,000 = P175,000.
Requirement 2Incremental sales (P600,000 15%)
P90,000
Contribution margin ratio
70%
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 3
(Basic Segmented Income Statement)
TotalCDDVD
Sales*
P750,000P300,000P450,000
Variable expenses**
435,000120,000315,000
Contribution margin
315,000180,000135,000
Traceable fixed expenses
183,000138,00045,000
Product line segment margin
132,000P42,000P90,000
Common fixed expenses not traceable to products
105,000
Net operating income
P27,000
*
**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 Questions1. B6. A11. A
2. C7. C12. B
3. B8. B
4. B9. D
5. B10. C
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