103. Managerial Accounting Ch11 Pt1: Segment Reporting

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“So we re beginning chapter 11 and our first learning. Objective is segment reporting and and to sort of get you to visualize what a segment is consider what i done on the left side of the screen. Here. I have a company that has two divisions division.

A and division b. And the company can generate a report one for division. A one for the division b. And one for the company as a whole.

But it can also take division b. And break it out into the two products. That division b. Produces product c.

And product d. So division b. Is a segment of the company product c. And product d are segments of division b.

We can further take products c. And break that down into sales territory east and west. So west would be a segment of product c. East.

Would be a segment of product c. You can then take west and break that out into sales that occur online versus sales that occur in stores. So these would be considered separate segments as well how deep we go into the company how far down we segment depends on the type of information management needs the further down your segment. The finer the granularity when i say granularity.

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I mean the finer the detail of the information you get. But there comes a limit to how far you want a segment before it no longer provides any extra useful information. So this is really just what segments are all about these are segments. So what a segments reporting well segment reporting is done in contribution format.

We create statements for each segment in a contribution format and it basically follows the contribution format. We re familiar with except when we get to the fixed costs so let s cover. What s obvious we start with revenue and revenue. Let s just say we re doing company.

A and division a and b. The revenue for the company as a whole is the sum of division. A and divisions b. Revenue minus the variable costs so the total variable costs are the sum of the variable costs for division a and division b and remember revenues minus variable costs equal our contribution margin.

So we have that so far so good now we subtract our fixed costs. But notice what i ve done here. I have this new word in front of fixed costs. Traceable fixed costs.

Traceable fixed costs are fixed costs that you can trace to a specific segment. So that it ll still be a fixed cost of the total company. But the fixed cost itself belongs to a specific segment and not the other segment. The existence of segment b here has a fixed cost that belongs to segment b.

If segment b disappeared that fixed cost would disappear. That s what we mean by traceable fixed cost so we want to trace everything we can to the proper segment. So once we subtract traceable fixed costs. We get a new word.

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We get the segment margin that s as far as we can go with the segment statements from that we have some common fixed costs fixed costs of the company as a whole that are not traceable to either segment. A or segment b entirely. But that if segment a or segment b disappeared. This fixed cost wouldn t disappear.

So we can think of the ceo salary here for traceable fixed costs. We can think of division a s manager s salary and division b managers salary. If division b weren t there that salary wouldn t be incurred so from our segment margin. We subtract our common fixed costs then we get the operating income so you can see on the contribution format.

Income statement everything is the same until we get to fix costs we break down fixed cost in terms of traceable traceable to the segment. We ll come up with a segment margin and a total segment margin for the company our common fixed costs. These are costs that cannot be traced to any segment for our operating income. So let s have a look at what that actually looks like with some numbers behind it okay well on the screen here i have a segmented contribution format.

Income statement and we can see our total company call them over here and the two segments. We have we have divisions business products division and consumer products division. And we can see that we have sales 500 thousand broken down into three hundred and two hundred so we see that these the individual sales numbers from each of the divisions add up to the total company then we subtract our variable expenses. We have variable cost of goods sold other variable expenses.

Which give our total variable expenses across we have two hundred and thirty thousand for the total company made up of a hundred and fifty four business products eighty. Four consumer products take arrive at a contribution margin for each of the divisions. And the company as a whole now from that notice. What s taken off traceable fixed expenses first and the traceable fixed expenses can come out of each division and once we do that we have our divisional segment.

Margin notice that that is where the segment report ends for the segment. So that s as far as we go from the total company though. We then subtract the common. Fixed expenses not traceable to the individual divisions of.

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85000 so this 85000. Would still exist even if you eliminated one of these divisions would still pay that 85 that s why it s called common it s common to all the divisions for an operating income of 15000. Now to demonstrate how it can be broken down. Even further let s just scroll down a bit and here.

We are we ve taken the consumer products division. Just that division. And we ve broken that down into two other sake by product line. The consumer products division breaks down into computer animation and into computer games.

And again. We start the same process again our sales less our variable expenses give us our contribution margin from our contribution margin. We have traceable fixed expenses now when we left the computer products division notice that we were able to trace 80000 of fixed expenses to the consumer products division. However once we get down to the consumer products.

Division the segment s within the division of that. 80000 we can really only trace. 70000 to the specific segments within. That segment and we see that.

10000 of the 80000 is common just to the existence of the consumer products. Division so again of the. 80000 that we were able to trace to. Consumer.

Products. 30000 we can we can trace to. Computer animation. 40000 to computer.

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Games but there s 10000. That we cannot attach to either one which means if computer games disappeared that 10000. Would still exist and of course. We can see the arrow here from computer games comes down.

And we can then break down computer games into online sales and retail stores and we go through the same process. Again but notice. Again we were able to trace 40000. Dollars of fixed expenses to computer.

Games however once we get down into finer detail of the 40000. We can only trace 15 of that specifically to online sales and 10 specifically to retail. Sales so it has 15000 of common expenses that means that if we get rid of the retail stores that. 15000 still says but we know of the total.

40000 in traceable overhead at the higher level 40000 traceable fixed. Expenses if we eliminate. Retail stores we could get rid of 10000 of that. 40000 because that is traceable just to the retail.

Stores but 15000. Would serve so that s a good good start and we re following along the example in the book as well. But that s a good start to show what the segmented income statement. Would look like broken down into traceable fixed.

Costs and common fixed costs again let me stress. That s the big new introduction. Here is that we re breaking down the fixed cost into two ” ..

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description:

“Learning Objectives covered: n1. Prepare a segmented income statement using the contribution format, and explain the difference between traceable fixed costs and common fixed costs.nnText used:nManagerial AccountingnTenth editionnGarrison et al.nPublisher: McGrawHill”,

tags:
Accountancy (Field Of Study), Segment reporting, CMA, Mark Meldrum, Management Accounting, Cost Accounting

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