COMM 1102 Lecture Notes - Lecture 11: Earnings Before Interest And Taxes, Fixed Cost, Income Statement
15 Oct 2018
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CHAPTER 11: Reporting for Control
Focus on parts/pieces of the company = segment
Segment: piece of the company as defined by the company (ex. geographic region - of country
or around the world, or diving the company by the product line)
To divide the company, people will get appointed to be the head of the region, and people take
on added responsibilities, performance will then get evaluated based on how well your region is
doing.
2 very distinct products:
Need to make sure they give adequate reporting, monthly reports back to whoever is
responsible for the region to see how things are going - their performance in their specific region
(costs, revenue..)
Key Competency
1. Segmented Income Statement - a contribution format income statement with a few more
added elements that will tailor the income statement
2. Different tool that the company will use to evaluate the performance of managers of specific
region - ability to earn a bonus
Allows the company overall to see how all the different pieces are doing
Evaluate how you’re doing compared to other regions are doing
Decide how to set up the company
There are 2 options:
1. Decentralized - many people around the company that are given the power to make
decisions, and they are compensated on their decisions, many people are held accountable,
and are evaluated on their performance
2. Centralized - very few people making key decisions, everything is confined to the head
office and the president
**Theory Question on Final Exam**
Decentralized
- allows upper level management to focus on vision and strategy, and people in operating
areas of company make their decisions based on what they’re doing
- however, the lower-level manager’s objectives may not be those of the organization because
they will make decisions based on what is best for their division, because they are only
evaluated on their performance in their specific region
- may be difficult to spread innovative ideas in the organization, because the managers will
keep their good ideas to themselves because then their performance will seem superior to
other regions, won’t share the best/most efficient practices
- design a system where managers are compensated, but also share their innovative
techniques
Centralized
- people making decisions are too far removed from the day to day, they are unaware of what
will work and what won’t - too far away
- only a few people make decisions, they are not impacted by other people, they are confident
in their abilities to make company-wide decisions
Move forward with the assumption that the company follows a decentralized system.
All fixed costs will be either: a traceable fixed cost, or common.
Traceable costs: one that is specifically identifiable and traceable to a particular division, they
would disappear if the segment goes away
Common costs: overall operation of the company and would not disappear if any particular
segment were eliminated (ex: president’s salary - if segment is shut down, this salary would still
be present, rent of a building - if it is being used by many divisions, and a division is shut down,
the cost would still be present)
**don’t allocate common costs to segments
Segment Margin = Contribution Margin — Traceable Fixed Costs
It is the best gauge of the long-run profitability
Return on Investment is an evaluation tool
Document Summary
Focus on parts/pieces of the company = segment. Segment: piece of the company as defined by the company (ex. geographic region - of country or around the world, or diving the company by the product line) To divide the company, people will get appointed to be the head of the region, and people take on added responsibilities, performance will then get evaluated based on how well your region is doing. Need to make sure they give adequate reporting, monthly reports back to whoever is responsible for the region to see how things are going - their performance in their specific region (costs, revenue) Allows the company overall to see how all the different pieces are doing. Evaluate how you"re doing compared to other regions are doing. Allows upper level management to focus on vision and strategy, and people in operating areas of company make their decisions based on what they"re doing.
