ACG - Module 23: Segment Reporting, Transfer Pricing, and Balanced Scorecard. Questions and Answers.
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ACG - Module 23
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ACG - Module 23: Segment Reporting, Transfer Pricing,
and Balanced Scorecard. Questions and Answers.
Segment Reporting, Transfer Pricing,
and Balanced Scorecard
DISCUSSION QUESTIONS
Q23-1. Segment reports are income statements that show operating results for portions or
segments of a busine...
Module 23
Segment Reporting, Transfer Pricing,
and Balanced Scorecard
DISCUSSION QUESTIONS
Q23-1. Segment reports are income statements that show operating results for portions or
segments of a business, while product reports are only for product lines of the
business. Product reports are a type of segment reports.
Q23-2. A reporting objective is an identified segment of a business that management has
defined as precisely as possible so that only related revenues and expenses are
assigned to it for reporting purposes.
Q23-3. If a company wants to evaluate its operations from different perspectives, it may have
more than one first-level set of statements. For example, it may want its product lines
segregated as first-level segments and also its divisions segregated as first-level
segments. Both first-level segment statements may have other defined segments as
second-level segment statements.
Q23-4. A first-level segment statement is the primary reporting of operations within the
company (an example being territories). A second-level segment statement is a
means of further defining a first-level statement. If territories are first-level statements,
each one of them can be further divided into second-level statements with
characteristics such as product lines, sales personnel, or type of customers
(wholesale, retail, etc.).
Q23-5. Direct segment costs are often defined negatively as the costs that would not be
incurred if the segment being evaluated were discontinued. Common, or indirect,
segment costs are related to more than one segment, and all or some of these costs
would remain if the segment were discontinued. Indirect segment costs, also referred
to as common segment costs, are related to more than one segment and are not
directly traceable to a particular segment.
,Q23-6. Management needs segment reports about the product or characteristic under
consideration, a correct defining of direct and indirect costs of the segment, and an
evaluation of the importance of the segment to the overall operations of the business.
Q23-7. Transfer prices are normally used in decentralized operations when products or
services are exchanged between divisions to determine whether organizational
objectives are being achieved in each division regarding costs and profits.
Q23-8. Transfer pricing problems include: the selling division wanting the highest possible
price and the buying division wanting the lowest possible price; suboptimization when
prices are set that are not in the best interest of the overall organization; transfers
where there are no external markets for comparison; and conflicts between managers
that may interfere with other decision-making activities, thereby causing further
conflicts.
Q23-9. Suboptimization occurs when the parts of an organization maximize their own
performance measures even if it is to the detriment of the entire organization. It can
be minimized by proper training and goal setting within the organization. The reward
system also influences the amount of suboptimization that takes place. It usually
cannot be eliminated because individual managers tend to be self-survivors and, in
doing so, tend to always help themselves first and the company second.
Q23-10. ROI measures the earnings of an investment and is used to evaluate the utilization of
the resources, the effectiveness and efficiency of the managers in control of the
resources, and comparisons of investments both within the organization and with other
organizations. This measure is often preferred over net income because net income
does not take into consideration the amount of resources used to generate the income.
Q23-11. Advantages of residual income and economic value added over return on investment
include:
1. Encourages managers to make profitable investments above the minimum rate of
return, even when they are below the current ROI level.
2. Results are measured in dollars rather than percentages.
Q23-12. Residual income is the excess of investment center income over the minimum rate of
return set by top management, whereas EVA uses the organization’s weighted
average cost of capital, net assets, and after-tax income.
,Q23-13. The balanced scorecard helps with the evaluation process by including multiple
categories to be evaluated, the most common of which are financial, customers,
employees, productivity, and growth and innovation.
Q23-14. By structuring the balanced scorecard around the company’s strategic goals, it
measures how well managers are performing in terms of the company’s strategic
goals. The balance scorecard will always include basic financial performance
measures, but it should also score performance on key strategic objectives.
M23-15.
a. A single-level segment report might show the total income statement broken down into
the four different lines of computer devices. Another possibility would be to segment the
total income statement broken down by the company’s three plants. Still another
possibility is to show the total income statement broken down by the five regions.
b. Note: Several schematics are possible and two examples are provided.
Product line is chosen as the first level because this is the most important reporting
aspect to top management. This is often used when the products are highly competitive
and each one needs careful monitoring.
Scheme 2
First-level Sales region
Second-level Product line
Third-level Plant location
Sales region is chosen to emphasize the need for different regions to compete against
each other. This is especially beneficial when the regions have about the same potential
sales levels.
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