Module 22
Segment Reporting and
Balanced Scorecard
(omit pp. 22-7 to 22-11)
• Decentralization - a form of organization in
which sub-unit managers are given authority
to make substantive decisions.
• Strongly decentralized - lowest level of
managers/workers making various quality
• Strongly centralized - all major decisions
made at the top level.
• The key issue is whether the sub-unit has
some degree of autonomy over its affairs.
Advantages of Decentralization
• Top management is freed to concentrate on
strategic and other high-level issues.
• Lower level managers have greater and
better information, which leads to greater
responsiveness to local needs and quicker
and better decision making.
• Increases motivation and job satisfaction.
• Aids management development and learning.
• Sharpens the focus of managers and aids in
performance evaluation.
Disadvantages of Decentralization
• Lower-level managers may pursue goals that
are incongruent with the goals of the
organization as a whole.
• Activities may be uncoordinated among
lower-level managers.
• Communication among divisions may be
• Lower-level managers may not see the “big
picture” and may have less loyalty toward the
organization as a whole.
Responsibility Accounting
Characteristics of responsibility centers are:
• The knowledge held the centers’ managers is
difficult to acquire, maintain, or analyze at
higher levels.
• The duties that a particular individual in an
organization is expected to perform are
specified for each center.
Types of responsibility centers (more later)
Cost center.
Profit center.
Investment center.
Segmented Reporting
• Effective decentralization requires segmented
• The concept of segmented reporting can be
extended to the customer level as well (e.g.,
customer profitability analysis).
• Segment reports separate fixed costs into
direct segment costs (costs traceable to the
segment) and allocated common segment
• When analyzing segments, the relevant
common costs are those that are avoidable
(e.g., can be changed in the short run.)
Cost Center
• Cost center manager has control over costs
but not revenue or investment.
• Examples include most service departments in
an organization, but manufacturing
departments may also be cost centers.
• Goal is to minimize costs while providing
services or products to other parts of the
• Minimizing costs does not necessarily
maximize profits. Cost centers have an
incentive to produce more units to spread fixed
costs over a large number of units.
• Quality of products produced by cost center
must be monitored.
Profit Center
• Profit center manager has control over both
costs and revenues.
• Examples may include branches or segments
of a company where a manager sets pricing
and production policies, but cannot control
investment decisions. Example: "Six Flags"
amusement parks.
• Problems with profit centers:
– How to allocate traceable fixed costs or
common fixed costs to profit centers.
– Profit centers that focus only on their own
profits often ignore how their actions affect
other responsibility centers.
Investment Centers
• Investment center manager has control of investment
opportunities as well as operating decisions.
• Authority and responsibilities of investment center
– Approve and monitor decisions of cost and profit
– Decide amount of capital invested or disposed.
• Performance measurements for investment center:
– Return on investment (ROI)
– Residual income (RI).
• Problems with evaluation of investment centers:
– Disputes over how to measure income and capital.
– Difficult to compare investment centers of different
Return on Investment
• Return on investment (ROI) for an investment center =
Net operating income/Average operating assets
DuPont formula separates ROI into two components:
ROI = Sales (Asset) turnover x Return on sales (Profit margin)
ROI = (Sales /Avg. assets) x
(Net op. income / Sales)
• ROI increases with smaller investments and larger profit
• Three ways to increase ROI:
– Increase sales more than costs (and increase operating income).
– Decrease costs (and increase operating income).
– Reduce operating assets.
• Performance evaluation using ROI can lead to underinvestment, actions not consistent with the organization’s
strategy, and may lead to unfair evaluations when committed
costs are significant components in ROI measures.
Residual Income
Residual income (RI) =
Acct. Income – (Minimum return % x Avg. Assets)
• RI is determined with financial accounting measurements
of net income and capital.
• Each investment center could be assigned a different
required rate of return depending on its risk.
• RI can be increased by increasing income or decreasing
• Residual income does not lend itself well to evaluating
responsibility centers of different size.
The Balanced Scorecard
• No single summary measure can provide a clear
performance target or can focus attention on the
critical areas of the business.
• More firms are using a portfolio of measures to
assess performance. These measures are both
financial and operational (nonfinancial).
• Kaplan and Norton (1992) have devised a
“balanced scorecard” that they argue provides
managers with a fast but comprehensive view of
the business.
• The scorecard consists of (1) financial measures
to summarize the results of actions already
taken, and (2) operational measures that are the
drivers of future performance.
Strategic Dimensions of The Scorecard
• The balanced scorecard is a way to clarify,
simplify, and then operationalize the vision at
the top of the organization.
• Perspectives of concern:
– Financial perspective.
– Customer perspective.
– Internal business perspective.
– Innovation and learning perspective.
Measuring Components of
Balanced Scorecard
Employee skills - proficiency exams.
Employee training - courses taken.
Process quality - measure number of defects.
Process cycle time - measure time to process
(manufacturing cycle efficiency).
On-time delivery - measure number of on-time
deliveries or length of delayed deliveries.
Customer loyalty - number of repeat customers.
Return on capital - ROI, earnings per share, P/E
A Restaurant Example
A new restaurant is being developed at a small ski
area. Previously, only snacks were available, and
skiers would bring their own meals. The
restaurant is being developed to meet more
customers’ needs, and to add to the profit of the
ski area.
Given IL (innovation and learning),
IB (internal business processes),
C (customer perspective),
and F (financial perspective).
Classify the following activities measured for the first
month of the new restaurant.
A Restaurant Example
1.Customer satisfaction with service, as measured by
customer surveys. C
2.Total restaurant profit for the month. F
3.Dining area cleanliness, rated by a “secret”
customer. IB
4.Average time to prepare an order. IB
5.Number of menu items. IB
6.Customer satisfaction with menu choices, measured
by a customer survey. C
7.Average time to take an order. IB
8.Percent of kitchen staff completing cooking course. IL
9.Sales F
10.Percentage of staff completing a hospitality
course. IL