Chapter 12: Segment Reporting, Profitability Analysis, and Decentralization
Key Terms and Glossary
Search the textbook's full glossary using the form below. The results will open in a new window. Following the search form are the key terms featured in this chapter of the textbook.
Common fixed cost: A fixed cost that supports more than one business segment, but is not traceable in whole or in part to any one of the business segments.
Cost centre: A business segment whose manager has control over cost but has no control over revenue or the use of investment funds.
Decentralized organization: An organization in which decision making is not confined to a few top executives but rather is spread throughout the organization.
Economic value added (EVA): A concept similar to residual income.
Intermediate market: A market in which a transferred product or service is sold in its present form to outside customers.
Investment centre: A business segment whose manager has control over cost and over revenue and that also has control over the use of investment funds.
Life cycle costing: A costing approach that focuses on all costs along the value chain that will be generated throughout the entire life of a product.
Margin: Net operating income divided by sales.
Market price: The price being charged for an item on the open (intermediate) market.
Market share variance: A measure of actual sales volume minus the anticipated portion of the actual market volume, multiplied by the budgeted contribution margin per unit.
Market volume variance: A measure of actual market volume minus budget market volume times anticipated market share, multiplied by the budgeted contribution margin.
Negotiated transfer price: A transfer price agreed on between buying and selling divisions.
Net operating income: Income before interest and income taxes have been deducted.
Operating assets: Cash, accounts receivable, inventory, plant and equipment, and all other assets held for productive use in an organization.
Profit centre: A business segment whose manager has control over cost and revenue but has no control over the use of investment funds.
Range of acceptable transfer prices: The range of transfer prices within which the profits of both the selling division and the purchasing division would increase as a result of a transfer.
Residual income: The net operating income that an investment centre earns above the required return on its operating assets.
Responsibility centre: Any business segment whose manager has control over cost, revenue, or the use of investment funds.
Return on investment (ROI): Net operating income divided by average operating assets. It also equals margin multiplied by turnover.
Sales mix variance: A measure of actual sales quantity minus actual sales quantity based on the budgeted mix, multiplied by the budgeted sales price.
Sales price variance: A measure of actual sales price minus the budgeted sales price, multiplied by the actual sales quantity.
Sales quantity variance: A measure of actual sales quantity based on budgeted mix minus the budgeted sales quantity, multiplied by the budgeted sales price.
Segment: Any part of an organization that can be evaluated independently of other parts and about which the manager seeks financial data. Examples include a product line, a sales territory, a division, or a department.
Segment margin: The amount computed by deducting the traceable fixed costs of a segment from the segment's contribution margin. It represents the margin available after a segment has covered all of its own costs.
Suboptimization: An overall level of profitability that is less than a segment or a company is capable of earning.
Traceable fixed cost: A fixed cost that is incurred because of the existence of a particular business segment.
Transfer price: The price charged when one division or segment provides goods or services to another division or segment of an organization.
Turnover: The amount of sales generated in an investment centre for each dollar invested in operating assets. It is computed by dividing sales by the average operating assets figure.
Value chain: The major business functions that add value to a company's products and services. These functions consist of research and development, product design, manufacturing, marketing, distribution, and customer service.
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