Albrecht 19.pdf - Marriott School

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960 Part 6 Control in a Management Accounting System
EXHIBIT 4
A Segment Margin Statement
International Manufacturing Corporation (IMC)
Segment Margin Statement
September 2009
(in millions of dollars)
Segments
Acme
Edison
IMC Computers Automobile
Net sales revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 25,000 $ 15,000 $ 10,000
Variable costs:
Cost of goods sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(16,000) $(10,000) $ (6,000)
Selling and administrative costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (3,300) (2,000) (1,300)
Total variable costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(19,300) $ (12,000) $ (7,300)
Contribution margin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,700 $ 3,000 $ 2,700
Less fixed costs controllable by segment manager . . . . . . . . . . . . . . . . . . . . . (1,900) (1,200) (700)
Segment margin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,800 $ 1,800 $ 2,000
Less indirect costs to segments (common costs) . . . . . . . . . . . . . . . . . . . . . . (1,500)
Operating profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,300
Segment-margin ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.2% 12.0% 20.0%
indirect costs
Costs normally incurred
for the benefit of several
segments or activities;
sometimes called common
costs or joint costs.
CAUTION
that some costs, indirect costs, will not be assigned to a particular segment
because the manager cannot control them. As you can observe in Exhibit 4,
when we break IMC down into smaller and smaller segments, more and more
costs are considered to be indirect or common. For example, the $1.5 million
indirect costs listed in the IMC column are not assigned to the Acme Computer
and Edison Automobile segments. These costs might include the IMC president’s
salary and interest on company-wide debt. As you can imagine, these
costs are not controlled by Acme Computer and Edison Automobile. Therefore, these
costs are not assigned to these segments.
Similarly, when Edison Automobile is broken down into smaller segments for analysis,
we see an additional $200,000 of indirect costs that are not assigned to Edison
Automobile’s three regions. Costs such as the division manager’s salary and advertising for
all regions are not controlled by the region
Many students confuse the terms variable and
fixed costs, controllable and noncontrollable
costs, and direct and indirect costs. Costs are
variable if they fluctuate with a specific activity.
If they don’t fluctuate with activity, costs are
fixed. Costs are controllable if they can be
changed by the activity manager. If they can’t
be changed by the activity manager, costs are
noncontrollable. Costs are direct if removing
the activity results in the costs being eliminated.
Costs that remain after an activity is
eliminated are indirect to that activity and
should be treated as common costs.
manager and so are not allocated to the regions.
You will note that as we move down
the organizational hierarchy, from divisions
to geographic regions to countries, indirect
costs increase in total; managers at the lower
levels have the narrowest range of responsibility
and the fewest costs to control. The
manager of manufacturing in Japan, for example,
will be responsible for the items ordered
for that unit but not for setting the
salary of the manager of Far East operations;
this is the responsibility of the manager of
Edison Automobile. The salary of the manager
of Far East operations is thus a direct
and controllable cost of Edison Automobile
and is an indirect and noncontrollable cost
to Japan operations.