Class Notes (903,409)
CA (537,984)
UTSG (45,699)
Rotman Commerce (1,105)
RSM222H1 (35)
Lecture

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

5 Pages
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Department
Rotman Commerce
Course Code
RSM222H1
Professor
Jacques Bertrand

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Decentralization:
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
eliminated
- Traceable FC of one segment may be common FC of another
FORMAT Æ
Sales
(VC)
CM
(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&$7(&20021&2676726(*0(176
- Traceable costs can become common if segments are further broken down
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Problems with Proper Cost Assignment:
1. omission of costs
o costs assigned to segments should include all costs attributable to that segment
IURP&R¶VHQWLUH9$/8(&+$,1HJ5'3URGXFW'HVLJQ
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 IRUFHVPDQDJHUVWREHKHOGDFFRXQWDEOHIRUFRVWVWKH\FDWFRQWURO
o *common FC cannot be eliminate by dropping segments!
Sales Variance Analysis: budgets--
- ACTUAL results = ACTUAL Q x ACTUAL selling
price(revenue)/VC(expenses)
- FLEXIBLE results = ACUTAL Q x BUDGETED selling price(revenue)/VC
(expenses)
- MASTER results = BUDGETED Q x BUDGETED selling
price(revenue)/VC(expenses)
- 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
unit
- 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
RETURN ON INVESTMENT (ROI)
= 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
Sales
Turnover =Sales
Average operating assets
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Description
Decentralization: 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 0.L8L438 -LJ5L.9:70 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 revenuesinvestment 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 bc existence of particular segment; disappears overtime if segment disappeared - Common Costs arises bc overall operation of Co.; NOT disappear if segment eliminated - Traceable FC of one segment may be common FC of another FORMAT Sales (VC) CM (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 - % % $%$% $*%$ - Traceable costs can become common if segments are further broken down www.notesolution.com
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