Ch. 8 - Performance measurement and reporting on segments Flashcards
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.
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.
Margin
Operating profit divided by revenue.
Operating profit
Profit before interest and profit taxes have been deducted.
Operating assets
Cash, debtors, 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.
Residual income
The net operating profit 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) formula
Net operating profit divided by average operating assets. It also equals margin multiplied by turnover.
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.
Traceable fixed cost (in relation to segments)
A fixed cost that is incurred because of the existence of a particular business segment.
Turnover
The amount of revenue generated in an investment centre for each pound invested in operating assets. It is computed by dividing revenue by the average operating assets figure.
