Page 965 - Accounting Principles (A Business Perspective)

25. Responsibility accounting: Segmental analysis

Items that a manager has direct control over are included in responsibility accounting reports for that
management level.
An appropriate goal of an expense center is the long-run minimization of expenses.

The salary of a segment manager would be considered a direct cost as well as an uncontrollable cost to that
segment.
Segmental net income is the most appropriate figure to use when evaluating the performance of a segment.
When calculating RI for a segment, the income and investment definitions are income controlled by a manager,
and assets directly used by and identified with the segment.
Multiple-choice
Select the best answer for each of the following questions.

The investment base used when determining the ROI calculation could be which of the following?
a. Current replacement cost.
b. Original cost.
c. Original cost less accumulated depreciation.
d. Any of the above.
Which of the following actions would increase ROI?
a. Reduce operating expenses with no effect on sales or assets.
b. Increase investment in assets, with no change in income.
c. Increase sales with no change in income or assets.

d. None of the above.
Calculate ROI using the expanded form (margin times turnover) from the following data:
Sales $1,000,000
Investment 500,000
Income 50,000
a. 20 per cent.
b. 10 per cent.

c. 15 per cent.
d. None of the above.
In evaluating the performance of a segment or manager, comparisons should be made with:
a. Other segments and managers within the company and in other companies.
b. Past performance of the segment manager.
c. The current budget.
d. All of the above.
Calculate the ROI and RI for each of the following segments and determine if a segment should be dropped
based on RI.

Segment 1Segment 2 Segment 3
Income $ 180,000 $ 1,000,000 $ 500,000
Investment 2,000,000 5,000,000 2,000,000
ROI ? ? ?
Desired minimum ROI 200,000 500,000 200,000
(10%)
RI ? ? ?
a. 9 per cent, 20 per cent, 20 per cent

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