This document discusses decentralization in operations and segment reporting. It defines decentralization and responsibility centers like cost centers, profit centers, and investment centers. It also explains how managers evaluate segment performance using return on investment, residual income, and economic value added. Segment reporting prepares an income statement that discloses financial details for each product segment. This helps managers assess the profitability and needs of different business divisions.
This document discusses decentralization in operations and segment reporting. It defines decentralization and responsibility centers like cost centers, profit centers, and investment centers. It also explains how managers evaluate segment performance using return on investment, residual income, and economic value added. Segment reporting prepares an income statement that discloses financial details for each product segment. This helps managers assess the profitability and needs of different business divisions.
This document discusses decentralization in operations and segment reporting. It defines decentralization and responsibility centers like cost centers, profit centers, and investment centers. It also explains how managers evaluate segment performance using return on investment, residual income, and economic value added. Segment reporting prepares an income statement that discloses financial details for each product segment. This helps managers assess the profitability and needs of different business divisions.
This document discusses decentralization in operations and segment reporting. It defines decentralization and responsibility centers like cost centers, profit centers, and investment centers. It also explains how managers evaluate segment performance using return on investment, residual income, and economic value added. Segment reporting prepares an income statement that discloses financial details for each product segment. This helps managers assess the profitability and needs of different business divisions.
Download as DOCX, PDF, TXT or read online from Scribd
Download as docx, pdf, or txt
You are on page 1/ 5
MODULE 4:
DECENTRALIZATION IN OPERATION AND SEGMENT REPORTING.
Mabuhay and welcome to Module 4: Decentralization in operation and segment reporting.
As a future CPA, you need to prepare reports that will aid management in decision making regarding segments or product lines
But before we start, let us read the ILOs.
Intended Learning Outcomes (ILOs):
At the end of the topic, the students are expected to be able to:
1. Articulate Decentralization in operation and responsibility centers;
2. Analyze the performance of an investment using Return on investment (ROI), Residual income, and Economic value added (EVA); 3. Prepare a Segmented income statement.
4.1 Decentalization in operation
Decentralization in an organization would mean that lower-level managers can decide within their accountability.
Unlike in Centralization, decision making is centralized at the head office.
The best scenario would be the Pag-ibig Fund, as a member, your data and contribution are decentralized to different areas.
If you work in Makati, your contributions would fall into the Pag-ibig Makati branch only.
Same scenario if you work in Quezon City. However, you need to request for an update to unify your contributions in Makati and Quezon City.
Unlike in SSS, your contribution in Quezon City and Makati will automatically be updated in your file contribution because the system is centralized.
Definitely, in every situation, there are advantages and disadvantages.
Here are some of the Benefits of Decentralization are:
1. Top management freed to concentrate on strategy.
2. Lower-level managers can respond quickly to customers. 3. Decision-making authority leads to job satisfaction.
And here are some of the disadvantages:
1. Lower-level managers may decide without seeing the complete picture.
2. Lower-level manager's objectives may not be aligned with the entire organization. 3. May lack uniformity and coordination in operation. 4.2 Responsibility centers In Decentralization, operations are segregated to segments or responsibility centers.
The responsibility centers are:
1. Cost center whose segment manager control costs but not revenues and investment funds. 2. Profit center whose segment manager control revenues and costs but not investment funds. 3. Investment center whose segment manager control revenues costs and investment in operating assets.
Segment managers would use these analyses as a measure of performance of an investment:
1. Return of Investment (ROI)
2. Residual Income 3. Economic Value Added
We discuss it one by one on the succeeding pages.
4.3 Return on investment (ROI)
Return of Investment (ROI) measures net operating income (NOI) earned relative to the investment in average operating assets (AOA)
.
Please take note of the following:
1. Net Operating Income (NOI) pertains to Earnings before interest and tax (EBIT) 2. Average operating assets comprise cash, accounts receivable, inventory, property & equipment, and other productive assets. 3. Most companies use Book value (Carrying amount) to calculate Average operating assets.
4.4 Residual income
Residual Income measures NOI earned less the minimum required return on AOA.
It encourages managers to make profitable investments that would be rejected by managers using ROI. However, residual income cannot be used to compare the performance of segments of different sizes.
4.5 Interpretations of ROI and residual income
Get your paper, pen, and calculator as we solve the illustrative activity.
Understand the interpretations.
I already gave the format, you just have to compute it but do not forget to analyze it via the interpretations.
If Sales increase by P20,000, what would be the effect on ROI? Will there be an increase or decrease? 4.6 Economic Value Added (EVA) Economic Value Added is a business unit's income after taxes and after deducting the cost of capital.
Take note of the business unit or the segment.
The formula:
Let us practice by solving the illustrative problem:
Hence, P39,600 is the business unit's EVA. It means that the business unit NOI is P39,600 more than the invested cost of capital.
4.7 Segment reporting
Segment reporting is the disclosure of financial information about the products and services an entity is the disclosure of financial information an entity about the products and services.
It emphasizes the performance of a certain segment rather than the company as a whole.
The best example is Samsung, wherein it has a different product line such as cell phone, laptops, and appliances
It is a modified version of Variable costing's income statement:
Notice the following:
1. Traceable fixed costs are deducted from each segment's contribution margin to arrive at the Divisional contribution margin. 2. Non-traceable fixed costs are deducted to the company's total divisional contribution margin to arrive at net operating income. 3. Any cost not traceable to a certain division will be deducted to the company's Total Divisional Segment margin. 4. Segment reporting provides managers a better look at the financial status of the company on a per segment's basis. 5. The contribution margin is for short-run decision making while the segment margin is for long-run decision making. Because traceable fixed costs are already included.
4.8 Divisional segment margin
To illustrate, let us analyze the situation:
Based on your computation, which division yield a higher margin?
4.9 Summary
1. Decentralization in organization would mean that lower-level managers can decide within their own accountability. 2. The responsibility centers are cost center, profit center and investment center. 3. Segment managers would use these analysis as a measure of performance of an investment are Return of Investment (ROI), Residual Income and Economic Value Added 4. Segment reporting is the disclosure of financial information about the products and services an entity is the disclosure of financial information an entity about the products and services. It is a modified version of Variable costing's income statement.
