This module examines strategic business segments and the use of segment reportin

Question

This module examines strategic business segments and the use of segment reporting and transfer pricing. Investment center evaluation measures are assessed as well as the emergence of the Balanced Scorecard as a strategic tool.  Long range planning and capital budgeting decisions are analyzed using non-discounting and discounting models, which involves a discussion on the time value of money and income tax effects.   

Required Readings:                          

Chapter 11 Segment Reporting, Transfer Pricing, and Balanced Scorecard                   

Chapter 12 Capital Budgeting Decisions

minimum 200 words

Explanation / Answer

Segment reports are commonly found to coincide with organizational responsibility. However they may also be readily prepared for any portion of a company for which management would like to see and evaluate performance data. Segment margin is nothing but the profit that is computed after subtracting segment direct fixed costs. In the short run if a segment is discontinued then its entire revenues, variable costs and direct segment costs should be avoidable. Hence in the short run the best profitability number for deciding the impact of discontinuing a segment is segment margin. In the long run the best profitability number for deciding the impact of discontinuing a segment is segment income after subtracting the allocated common segment costs.

Transfer price can be assigned for the transfer of a product or a service between any two responsibility centers - cost, revenue, profit, or investment center.

Balanced Scorecard is used as a strategic management tool and helps management to translate their vision, communicate and link, do business planning, and incorporate feedback and learning. The perspectives that are considered are – financial perspective, internal perspective, customer perspective and learning and growth perspective.

Capital budgeting decisions are analyzed using models that include both non-discounting techniques as well as discounting techniques. Models using discounting techniques are better as they take into consideration the time value of money. Discounting techniques are more scientific and helps in taking better decisions. Examples of such models are net present value method, Internal rate of return method, Benefit Cost ratio and Accounting rate of return method. Cash flows = earnings before income and taxes (EBIT)+depreciation – taxes. This gives us the operating cash flow and this is relevant in capital budgeting.

Related Questions

Navigate

• Browse (All)
• Browse T
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.