Segment Reporting

1
Segment Reporting
2
Segment Reporting
An Individual Store

• A segment is any part or activity of an
  organization about which a manager seeks cost,
  revenue, or profit data. A segment can be . . .

Quick Mart
A Sales Territory
A Service Center
3
Cost, Profit, and Investments Centers

• Cost Center
• A segment whose manager has control over
  costs,
• but not over revenues or investment funds.

Cost
Cost
Cost
4
Cost, Profit, and Investments Centers

• Profit Center
• A segment whose manager has control over both
  costs and revenues,
• but no control over investment funds.

Revenues
Sales Interest Other
Costs
Mfg. costs Commissions Salaries Other
5
Cost, Profit, and Investments Centers

• Investment Center
• A segment whose manager has control over
  costs, revenues, and investments in operating
  assets.

Corporate Headquarters
6
Cost, Profit, and Investments Centers
Cost Center
Profit Center
Investment Center
Cost, profit, and investment centers are
all known as responsibility centers.
Responsibility Center
7
Traceable and Common Costs
Fixed Costs
Traceable
Common
Costs arise because of the existence of a
particular segment
Costs arise because of overall operating activitie
s.
8
Traceable and Common Costs
Fixed Costs
Dont allocate common costs.
Traceable
Common
Costs arise because of the existence of a
particular segment
Costs arise because of overall operating activitie
s.
9
Identifying Traceable Fixed Costs

• Traceable costs would disappear over time if
  the segment itself disappeared.

No computer division means . . .
No computer division manager.
10
Identifying Common Fixed Costs
Common costs arise because of overall
operation of the company and are not due to the
existence of a particular segment.
No computer division but . . .
We still have a company president.
11
Levels of Segmented Statements
Webber, Inc. has two divisions.
Lets look more closely at the Television
Divisions income statement.
12
Levels of Segmented Statements

• Our approach to segment reporting uses the
  contribution format.

Cost of goods sold consists of variable
manufacturing costs.
Fixed and variable costs are listed
in separate sections.
13
Levels of Segmented Statements

• Our approach to segment reporting uses the
  contribution format.

Segment margin is Televisions contribution to
overall operations.
14
Levels of Segmented Statements
Lets see how the Television Division fits into
Webber, Inc.
15
Levels of Segmented Statements
Segment margin has now become division margin.
Lets add the Computer Divisions numbers.
16
Levels of Segmented Statements
17
Levels of Segmented Statements
Common costs arise because of overall operating
activities.
18
Segment Margin

• The segment margin is the best gauge of the
  long-run profitability of a segment.

Profits
Time
19
Hindrances to Proper Cost Assignment
The Problems
Omission of some costs in the assignment
process.
Assignment of costs to segments that are really
common costs of the entire organization.
The use of inappropriate methods for allocating
costs among segments.
20
Segmented Statements

• Abra company has been experiencing losses for
  some time, as shown by its most recent monthly
  income statement below

21
Segmented Statements
In an effort to isolate the problem, the
president has asked for an income statement
segmented by division. Accordingly, the
accounting department has developed the following
information
22
Segmented Statements

• Prepare an income statement segmented by
  divisions, as desired by the president. Show both
  amount and percentage columns for the company as
  a whole and for each division.
• As a result of a marketing study, the president
  believes that sales in the west division could be
  increased by 20 if advertising in that division
  were increased by AED 15,000 each month. Would
  you recommend the increased advertising?