DECENTRALIZED OPERATIONS AND SEGMENT REPORTING

1. Concept of Decentralized Operations

 Decentralization – process of delegating the decision-making authority throughout an organization
 Centralized approach
 Top management retains control over key business functions, ensuring a desired level of
performance.
 With top management involvement in most decisions, the expertise of top management can be
effectively coordinated.
 Decentralized approach
 Managers are allowed at various operating levels the authority to make decisions relating to their
area of responsibilities.
 Informal relationships and channels of communication can develop outside the formal reporting
relationships on the organization chart as a result of personal contact among managers.
2. Segmental Income Statement
 Segment – part or activity of an organization about which manager seeks costs, revenue or profit data.
 Contribution margin for the segment is particularly useful in determining what happens to profit as
volume changes, assuming that the segment’s capacity and fixed costs are constant.
 Only the traceable or direct fixed costs are charged to the segments. Traceable fixed costs of a
segment is a fixed cost that is incurred as a consequence of the existence of the segment and could be
easily identified or traced to the particular segment.
 Segment margin represents the margin available after a segment has covered all of its own costs and
the best gauge of the long-run profitability of a segment.

Company Division A Division B
Sales P xx P xx P xx
Less: Variable Cost of Goods Sold xx xx xx
Manufacturing Margin xx xx xx
Less: Variable Operating Expenses xx xx xx
Contribution Margin xx xx xx
Less: Controllable Fixed Costs xx xx xx
Contribution Controllable by Managers xx xx xx
Less: Fixed Costs Controllable by others xx xx xx
Segment Margin xx P xx P xx
Less: Common Fixed Costs xx
Operating Income P xx


Company Division A Division B
Sales P xx P xx P xx
Less: Variable Cost of Goods Sold xx xx xx
Manufacturing Margin xx xx xx
Less: Variable Operating Expenses xx xx xx
Contribution Margin xx xx xx
Less: Traceable Fixed Costs xx xx xx
Segment Margin xx P xx P xx
Less: Common Fixed Costs xx
Operating Income P xx