Blueprint Problem: Profit Centers and Segmented Income Statements

Centralized and Decentralized Operations

In a centralized company, all major planning and operating decisions are made by top management. For example, a one-person, owner-manager-operated company is centralized because all plans and decisions are made by one person. In a decentralized company, managers of separate divisions or units are delegated operating responsibility. The division (unit) managers are responsible for planning and controlling the operations of their divisions. For example, in some companies, division managers have authority over profits but not fixed asset purchases.

In a small owner-manager-operated business, Select decentralization centralizationCorrect 1 of Item 1 may be desirable. This is because the owner-manager's close supervision ensures that the business will be operated in the way the owner-manager wishes.

Profit Center Performance

In a decentralized business, accounting assists managers in evaluating and controlling their areas of responsibility, called responsibility centers. Many companies use responsibility centers to achieve goals between a segment of the company and the company itself. Responsibility centers are normally one of four types: cost (or expense) center, revenue center, profit center, or investment center.

The center's name indicates the type of function. For example, a profit center is a segment of the business for which a manager has the responsibility and authority for making decisions that affect Select only revenues only expenses revenues and costsCorrect 2 of Item 1 and, thus, profits.

The profit center income statement should include Selectall revenues and expenses only revenues and expenses that are not controlled only revenues and expenses that are controlledCorrect 3 of Item 1 by the manager. Controllable revenues are revenues earned by the profit center. Controllable expenses are costs that can be influenced (controlled) by the decisions of profit center managers.

Hide

APPLY THE CONCEPTS: Construction of a segmented income statement

Yost has decided to expand its business into cookware, and plans to manufacture standard, deluxe, and economy cookware in one factory. Common fixed overhead for the factory is estimated to be $42,000, and common selling and administrative expenses are estimated to be $7,000. Sales commissions (a variable cost) of 3% of sales are paid on all product lines. The following estimates are available for 2012:

	Standard	Deluxe	Economy
Sales	$175,000	$315,000	$210,000
Variable cost of goods sold	87,500	126,000	63,000
Direct fixed overhead	16,450	53,865	35,175
Direct fixed selling and administrative expenses	8,225	35,910	16,884

Using this information, construct a segmented income statement that displays the income statement information for each segment of the business and for the business as a whole.

Enter all amounts as positive numbers. If required, round amounts to the nearest cent.

Yost Company
Segmented Income Statement
For the Year 2012
		Standard		Deluxe		Economy		Total
Sales		$		$		$		$
Variable cost of goods sold
Variable selling expense
Contribution margin		$		$		$		$
Less direct fixed expenses:
Direct fixed overhead
Direct selling and administrative
Segment margin		$		$		$		$
Less common fixed expenses:
Common fixed overhead
Common selling and administrative
Operating income								$