RESPONSIBILITY ACCOUNTING
CM FORMAT (Segment Margin and Controllable Margin)
Sales
Variable manufacturing costs
Manufacturing contribution margin
Variable selling and administrative cost
Contribution margin
Less: Controllable fixed costs (DIRECT)
- Manufacturing or Non-manufacturing
- Selling and Administrative
Controllable/Performance Margin
Less: Non - controllable fixed costs (DIRECT)
- Depreciation
- Rent, Leases, Insurance
Segment margin
Less: Allocated Common Costs
Income
Allocated Common Costs - indirect expenses,
such as rent, utilities or administrative salaries,
incurred to support multiple departments,
products or services, but not directly traceable to
any single one.
- Labor Hours
- Machine Hours
- Sales Revenue
- Number of employees
RETURN ON INVESTMENT
NOTE:
ROI = Operating Income
Average operating assets = BB + EB A) If Operating Income is not given,
Operating Assets
2 segment margin can be used
Alternative formula: B) OI refers to EBIT
Formula:
ROI = Margin x Turnover EBIT
Less: Interest Expense
= Operating Income Sales EBT
Sales Operating Assets Less: Taxes
EAT or NI
NOPAT: EBIT
less: Tax (%)
NOPAT
ROI based on Du Pont formula: C) Operating Assets includes all assets,
Return on Assets = Return on Sales x Asset Turnover except marketable securities,
investments and idle assets
ROS = Net Income
Net Sales
Net Income Net Income Sales
Assets Sales Assets
ROA = Net Sales
Average Turnover Asset
ROI = Net Income
Average Total Assets
RESIDUAL INCOME (RI)
RI = Operating Income - Required Income
Required Income = Operating Assets x minimum required rate of return
Or;
RI = Operating Income - (minimum required rate of return x Operating Assets)
Note: Minimum ROI is also known as
desired rate of return, business quota, or
minimum required rate of return.
ECONOMIC VALUE ADDED
EVA = Operating Income After Tax - ( Average Operating Assets X WACC)
Required/Minimum
(Total Assets - Current Liabilities) acceptable rate of
return
Or;
EVA = Operating Income After Tax - Required Income Note: Operating Income After Tax
Required Income = (Total Assets - Current Liabilities) x WACC is based on formula of;
[EBIT x (1 - tax rate)
TRANSFER PRICING
Transfer Price - it is an amount that is charged by one ➢ When selling division has an excess capacity, transfer
segment for products or services to one another segment. price must be based on the variable costs incurred to
produce each unit. In practice, this price usually serves
It is also known as inter-segment price.
as the MININUM (floor) or lower threshold in a
transfer price negotiation or as the basis for cost-based
Methods in Determining Transfer Price pricing.
1) COST-BASED TRANSFER PRICE
- vc 4) ARBITRARY PRICE
- full costs (variable and fixed manufacturing and non-manufacturing) It is imposed by the corporate headquarters to promote over-all
company goals with neither the selling division nor the buying
- full absorption costs (variable and fixed manufacturing costs)
division having a control over the price.
- cost plus (VC,FC, FAC, FAC plus mark-up)
2) MARKET-BASED TRANSFER PRICE
- maximize the overall companies profit;
1) market price (regular selling price)
2) modified price (SP adjusted for any allowance for discount, etc.)
3) NEGOTIATED PRICE (MAXIMUM VS MINIMUM
TRANSFER PRICES)
In negotiating a transfer price, the usual range shall be based on
the following:
UPPER Limit:
➢ Maximum price (buying division): market price — cost of buying from
outside suppliers
LOWER limit:
➢ Minimum price (selling division): outlay cost + opportunity cost
Variable Cost + Lost CM per unit on outside customers
Whichever is higher;
1) cost buying from outside suppliers
2) selling price to outside customers
NOTE: When a company segment is operating at full capacity, the lost
CM per unit on outside sales is the opportunity cost
of transferring products to another company segment, instead of selling
product to outside customers.
~ OUTLAY COST includes selling division’s variable production costs
(e.g., materials, labor and variable overhead) plus any additional costs
incurred (e.g., storage, transportation, administrative).
~ OPPORTUNITY COST refers to the margin or profit sacrificed
by transferring units internally rather than selling them to external
customers. Depending on sales demand and production capacity of
the selling division, there may or may not be an opportunity cost
associated with the internal transfer:
✓ Selling division is operating at capacity (FULL Capacity):
Opportunity cost = contribution margin (given up for sacrificing
external sales)
✓ Selling division is operating at less than full capacity (EXCESS/
IDLE Capacity):
Opportunity cost = zero (nothing to sacrifice when there is no
need to give up external sales)
➢ When selling division is operating at capacity, market price is the
‘theoretically correct’ transfer price.