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Textbook Notes on Chapter 12-ReportingForControl, Chapter 13-Relevant Costs and Decision Making

Rotman Commerce
Course Code
Jacques Bertrand

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Benefits ±
1. top management ± freed to concentrate on strategy
2. lower-level managers ± gain decision making experience
3. decision-making authority = job satisfaction
4. lower-level decision = based on better information
5. lower-level managers ± respond quickly to customers
Disadv. ±
1. lack of coordination among autonomous managers
2. lower-level managers ± GHFLVLRQV12³ELJSLFWXU
3. lower-level managers ± objectives not same as organizations
4. difficult to spread innovative ideas in organization
Responsibility Centre:
1. cost centre ± manager = control over costs NOT revenues/investment funds
2. profit centre ± manager = control over costs and revenues NOT investment funds
3. investment centre ± manager = control over costs, revenues, and investments in
operating assets
Segments ±
e.g. geographic regions
customer channel
Segmented income statements:
- traceable FC should be separated from common FC to enable calculation of
segment margin
- Traceable Costs ± arises b/c existence of particular segment; disappears overtime
if segment disappeared
- Common Costs ± arises b/c overall operation of Co.; NOT disappear if segment
- Traceable FC of one segment may be common FC of another
(Traceable FC)
Division Margin
(Common cost)
Net Operating income
Segment margin ± contribution margin ± traceable FC (of segment)
- best gauge of long-run profitability of a segment
- '27$//2&$7(&20021&2676726(*0(176
- Traceable costs can become common if segments are further broken down
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Problems with Proper Cost Assignment:
1. omission of costs
o costs assigned to segments should include all costs attributable to that segment
Manufacturing, Marketing etc.)
2. inappropriate methods of cost allocation
o failure to trace costs directly
o inappropriate allocation base
3. common costs are mistakenly assigned to segments
o may make business appear unprofitable
o *common FC cannot be eliminate by dropping segments!
Sales Variance Analysis: budgets--
- ACTUAL results = ACTUAL Q x ACTUAL selling
- FLEXIBLE results = ACUTAL Q x BUDGETED selling price(revenue)/VC
- MASTER results = BUDGETED Q x BUDGETED selling
- Selling P variance = Flexible ± Actual Sales(revenue)
= (Actual-Budgeted P) x Actual Sales Volume
- Sales Volume Variance = Flexible ± Master CM
= (Actual ± Budgeted Q) x Budgeted CM
- Market Volume Variance
= (Actual ± Budget Market Volume) x Expected Market Share % x Budgeted CM per
- Market Share Variance
= [Actual Sales Q ± (actual market share ± expected market share)] x Budgeted CM
per unit
Marketing Strategy:
Order Getting ± advertising, selling commissions, travel
Order Filling ± warehousing, transportation, packing, credit
= Operating income (income before interest and taxes ± EBIT)
Average operating assets (cash, AR, inv., plant/equip, - other productive assets)
o Calculate using NBV of depreciable assets - Acquisition cost LESS:
Accumulated depreciation = NBV)
= Margin x Turnover
Margin = Operating Income
Turnover =Sales
Average operating assets
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