MANAGEMENT ACCOUNTING (VOLUME II) - Solutions Manual

CHAPTER 21
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.

II. Problems
Problem 1 (Working with a Segmented Income Statement)
21-1

Chapter 21 Decentralized Operations and Segment Reporting

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 Company
Manila
Cebu
Amount
%
Amount
%
Amount
%
Sales.............................................
P800,000 100.0% P200,000 100% P600,000 100%
Less variable expenses.................
420,000
52.5
60,000 30
360,000 60
Contribution margin....................
380,000
47.5
140,000 70
240,000 40
Less traceable fixed
expenses....................................
168,000
21.0
78,000 39
90,000 15
Office segment margin.................
212,000
26.5
P 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

Sales

Total Company
Amount
%
P1,500,000 100.0

21-2

East
Amount
%
P400,000 100

Geographic Market
Central
West
Amount
%
Amount
P600,000 100 P500,000

%
100

Decentralized Operations and Segment Reporting Chapter 21

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)

588,000
912,000
770,000

39.2
60.8
51.3

142,000

9.5

175,000
P (33,000)

11.7
(2.2)

208,000
192,000
240,000

52
48
60

180,000
420,000
330,000

30
70
55

200,000
300,000
200,000

40
60
40

P(48,000) (12) P90,000

15

P100,000

20

* P945,000 P770,000 = P175,000.

Requirement 2
Incremental 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.
III. Multiple Choice Questions
1.
2.
3.
4.
5.

B
C
B
B
B

6.
7.
8.
9.
10.

A
C
B
D
C

11. A
12. B

21-3