1. Decentralization Autonomy Authority to make decisions Responsibility 12 Segment Reporting and Decentralization Chapter

2. Baby Care Food and Beverage Fabric and Home Care Production Marketing Finance Advantages? Disadvantages? What management control system? Example of Decentralization Proctor & Gamble

3.  Cost Center Responsibility Centers  Profit center  Investment center

4. Segment Reporting  Possible segments:  divisions w/in a company  product lines w/in a division  Report by segment:  revenues  variable expenses  traceable fixed expenses  Do not allocate common fixed expenses to segments.  segment managers cannot control these Segment margin

5. Issues in Responsibility Accounting  Responsibility for which expenses?  Gain or loss on sale of equipment?  Depreciation?  Taxes?  Does responsibility require complete control?  Are comparisons meaningful across operating units?  Should common costs ever be allocated?

6. Evaluating Investment Center Performance Required rate of return18% Weighted-average cost of capital15% Tax rate30% Compagnie du Froid

7. FranceItalySpain Fr 75,400 71,600 Fr 2,400 22,900 (7,300) Fr 3,800Fr 18,000 Fr 4,200 Fr 42,500 40,100 Fr 1,500 18,700 (10,200) Fr 2,400Fr 10,000 Fr 1,100 Fr 59,900 56,300 Fr 1,200 20,100 (5,300) Fr 3,600Fr 16,000 Fr 800 Revenue Operating exp Net income Assets Current assets Plant & equip Accum deprec. Total assets Current liabilities

8. Return on Investment (ROI) Income Investment = Fr 18,000Fr 10,000Fr 16,000 FranceItalySpain Fr 3,800Fr 2,400Fr 3,600Oper. Income Alternative Investment measures Total assets Fr 13,800Fr 8,900Fr 15,200 Total assets - current liab. Fr 25,300Fr 20,200Fr 21,300 Gross book value

9. Residual Income = Income - (Required rate of return x Investment) Fr 18,000Fr 10,000Fr 16,000 FranceItalySpain Fr 3,800Fr 2,400Fr 3,600Oper. Income Total assets Residual income ROI

10. Economic Value Added (EVA) 27.5%27.0%23.7%ROI (assts-c_liab) 123 Fr 560Fr 600Fr 720Residual income 123 Fr 18,000Fr 10,000Fr 16,000 FranceItalySpain Fr 3,800Fr 2,400Fr 3,600Oper. Income Total assets Fr 13,800Fr 8,900Fr 15,200 Total assets - current liab. EVA After taxTotalCurrent IncomeAssetsLiabilities =-[ WACCx (- )]

11. The price one division charges to another for goods or services. Micro-transmitterPocket Cellular Component Division Cellular Phone Division Transfer Prices

12. Objectives of transfer pricing system:  Autonomy of the division managers.  Decisions are in the best interest of the firm.  Transfer price fairly represents each manager’s contribution to the firm.  Ease of implementation.

13. Component DivisionCell Phone Division Micro T $ 10.00 2.00 4.00 500 $ 4.00 $ 2,000 Other Compnts $ 8.00 1.50 3.00 4,500 $ 3.50 $15,750 Price DL / unit CM / unit Total CM DM / unit Units Pocket C $ 60.00 22.00 13.00 500 $ 15.00 $ 7,500 10.00 Other Phones $ 50.00 26.00 8.00 3,000 $ 16.00 $48,000 A transfer price of $10.00. Other phones are higher margin for Cell Phone Division. Transfer Pricing Example

14. Component Division If Cell Phone Division wants to renegotiate… Micro T $ 10.00 2.00 4.00 500 $ 4.00 $ 2,000 Other Compnts $ 8.00 1.50 3.00 4,500 $ 3.50 $15,750 Price DL / unit CM / unit Total CM DM / unit Units 1.Component Division has idle capacity. 2.Component Division is at full capacity. a.$10 mkt for Micro T b.No mkt for Micro T

15. If Component Division wants to renegotiate… Cell Phone Division Price DL / unit CM / unit Total CM DM / unit Units Pocket C $ 60.00 22.00 13.00 500 $ 15.00 $ 7,500 10.00 Other Phones $ 50.00 26.00 8.00 3,000 $ 16.00 $48,000 1.Cell Phone Division has idle capacity. a.$10 mkt for Micro T 2.Cell Phone Division is at full capacity. b.No mkt for Micro T

16. When is a transfer in the best interest of the firm?  Answer: When a price can be found that will satisfy both managers.  If the transfer helps both divisions, it helps the firm as a whole.  Notice that a transfer is not always in the firm’s best interest. 2.Component Division is at full capacity. b.No mkt for Micro T Minimum price = $9.50 2.Cell Phone Division is at full capacity. Maximum price = $9

17. Options Variable cost + opportunity cost Market price Cost + mark-up Negotiated by managers Advantages ensures optimal decisions for the firm a good price if a market exists easy to implement manager autonomy generally good decisions Disadvantages difficult to measure markets often don’t exist or are imperfect too high if supplying division has idle capacity no incentives to control costs; OH allocation games time-consuming Possible Transfer Prices