What is a segment?

In Financial Reporting
It is any part of the business
that has separate financial
information and a separate
management strategy.

In Financial Accounting
it is a discrete business
unit for which separate
financial information is
prepared and evaluated by
an operating decision
maker within the
organization
Reportable Segments
1. Segment revenue is10% or more of the
combined revenue.
2. The absolute amount of profit or loss of the
segment is10% or more.
3. Segment assets are10% or more of the
combined assets.
4. 75% threshold
In Managerial Accounting
A Segment is any part or activity of an organization
about which a manager seeks cost, revenue, or profit
data

Public companies are required to report by segment

in the notes of financial statements

Management accounting often reviews the

company by segment to determine which areas
or lines are working better than others.
SEGMENTED REPORTING
• preparation of accounting reports by segment and for the organization
as a whole.
• the reporting of the operating segments of a company in the
disclosures accompanying its financial statements.
• required for publicly-held entities, and is not required for privately
held ones.
KEY FEATURES OF SEGMENTED REPORTING:

Contribution Format
+ Sales

Variable production expenses (such as materials,

-
supplies, and variable overhead)

- Variable selling and administrative expenses

= Contribution margin

Fixed production expenses (including most overhead)

-

- Fixed selling and administrative expenses

= Net profit or loss

Controllable vs. uncontrollable expenses
 Controllable Costs
Controllable costs are costs that can be influenced or regulated by the
manager or head responsible for it.

 Uncontrollable Costs
Uncontrollable costs are those that are not under the control of a
specified manager. These cannot be influenced by decisions or actions of the
manager. These costs are imposed by the top management or allocated to
several departments. For example, a company-wide advertising cost that is
allocated by the central office to different departments is not under the
control of the department heads.
SEGMENTED INCOME STATEMENT
 A segmented income statement is a managerial accounting tool that
breaks the income statement down into different categories. It could be a
manufacturing company that produces and sells different types of goods,
or a retail company that has different product segments. It breaks down
the revenue, cogs, and if possible operational costs between the products
or divisions. Another type could be if a large company has many different
divisions or types of operating income under one parent company they
could segment the income statement between those divisions.
Levels of Segmented Income
Statements

OUR APPROACH TO SEGMENT

REPORTING USES THE
CONTRIBUTION FORMAT.
 Segmented Income Statements – Decision
Making
Computer Retail Catalog
Games Stores Sales
Sales $125,000 $100,000 $25,000
Variable expenses:
Variable COGS 40,000 32,000 8,000
Other variable expenses 15,000 5,000 10,000
Total variable expenses 55,000 37,000 18,000
Contribution margin 70,000 63,000 7,000
Traceable fixed expenses 25,000 15,000 10,000
Sales-channel segment margin 45,000 $ 48,000 $(3,000)
Common fixed expenses not
traceable to individual sales channels 15,000
Product-line segment margin $ 30,000
 Segmented Income Statements – Decision
Making

Assume that the Retail Stores total traceable fixed

expenses ($15,000) remain constant and its
contribution margin ratio remains constant at 63%.

If retail stores sales increase $10,000 (100,000 x 10%),

then the Retail Stores segment’s contribution margin
will increase by $6,300 (10,000 x 63%).
Segmented Income Statements – Decision
Making

Avoidance of the catalog segment’s loss $3,000

Retail Stores additional CM 6,300
Increase in net operating income $9,300
 Segmented Income Statements – Break-even
Analysis

Dollar sales for company to

= Traceable fixed expenses + Common fixed expenses
breakeven Overall CM ratio
 Segmented Income Statements – Break-even
Analysis
Total Business Consumer
Company Products Products
Sales $500,000 $300,000 $200,000
Variable expenses:
Variable COGS 180,000 120,000 60,000
Other variable expenses 50,000 30,000 20,000
Total variable expenses 230,000 150,000 80,000
Contribution margin 270,000 150,000 120,000
Traceable fixed expenses 170,000 90,000 80,000
Sales-channel segment margin 100,000 $ 60,000 $40,000
Common fixed expenses not
traceable to individual sales channels 85,000
Product-line segment margin $ 15,000
 Segmented Income Statements – Break-even
Analysis

Dollar sales for company to

= Traceable fixed expenses + Common fixed expenses
breakeven Overall CM ratio

= $170,000+85,000
0.54

= $472,222
 Segmented Income Statements – Break-even
Analysis

Dollar sales for a segment to Segment traceable fixed expenses

=
breakeven Segment CM ratio
 Segmented Income Statements – Break-even
Analysis
Total Business Consumer
Company Products Products
Sales $500,000 $300,000 $200,000
Variable expenses:
Variable COGS 180,000 120,000 60,000
Other variable expenses 50,000 30,000 20,000
Total variable expenses 230,000 150,000 80,000
Contribution margin 270,000 150,000 120,000
Traceable fixed expenses 170,000 90,000 80,000
Sales-channel segment margin 100,000 $ 60,000 $40,000
Common fixed expenses not
traceable to individual sales channels 85,000
Product-line segment margin $ 15,000
 Segmented Income Statements – Break-even
Analysis

Dollar sales for a segment to

= Segment traceable fixed expenses
breakeven Segment CM ratio

= $90,000
0.50

= $180,000 Business Products

= $80,000
0.60

= $133,333 Consumer Products

 Segmented Income Statements – Break-even
Analysis
Total Business Consumer
Company Products Products
Sales $313,333 $180,000 $133,333
Variable expenses 143,333 90,000 53,333
Contribution margin 170,000 90,000 80,000
Traceable fixed expenses 170,000 90,000 80,000
Segment margin 0 $ 0 $ 0
Common fixed expenses 85,000
Net operating loss $(85,000)
Guidlines in Assigning Costs to
Segments

source: https://courses.lumenlearning.com/sac-
managacct/chapter/segment-analysis/
 Costs

DIRECT INDIRECT

specifically not traceable

traceable to to a given cost
a given cost object but has
object been
allocated to it
 An indirect cost is not traceable to
a particular cost object; therefore, it
only becomes an expense of the
cost object through an allocation
process.
 DIRECT INDIRECT
- clearly identified with - indirect costs
that segment become segment
- controllable by the costs only through
segment manager allocation
- noncontrollable by
the segment manager
Arbitrary Allocations of Indirect Fixed Expenses

Two basic guidelines for allocating indirect

fixed expenses:

the responsibility
for the
benefit received incurrence of
the expense
 EXAMPLES:
BENEFIT RESPONSIBILITY
RECEIVED FOR INCURRENCE

• Total of 10,000 hours • Segment M contracts with

• Segment K used 4,000 a magazine to run an
hours advertisement benefiting
• Segment K could be Segment M and various
charged (allocated) with other segments of the
40 percent of the company
computer’s depreciation • Allocate the entire cost of
for the period the advertisement to
Segment M because it
was responsible for
incurring the advertising
expense
Assume that ABC Company operates two
segments, X and Y. It allocates the following
indirect expenses to its two segments using
the designated allocation bases:
Inappropriate Methods of Allocating Costs
Among Segments

Failure to trace
costs directly

Inappropriate
allocation
base
A cost for which there is a direct, cause-and-effect relationship with a
process, product, customer, geographical area, or other cost object.
If the cost object goes away, then the traceable cost associated with it
should also disappear.
 are costs that are not traceable to a specific segment within the
business.
These are costs that fund people, resources or activities that support
more than one segment within the business.
Identifying Traceable Fixed Costs
10-33

Traceable costs arise because of the

existence of a particular segment and would
disappear over time if the segment itself
disappeared.

No computer No computer
division means . . . division manager.
Identifying Common Fixed Costs
10-34

Common costs arise because of the overall

operation of the company and would not
disappear if any particular segment were
eliminated.
No computer We still have a
division but . . . CEO.
Traceable Costs Can Become
10-35

Common Costs

It is important to realize that the traceable

fixed costs of one segment may be a
common fixed cost of another segment.

For example, the landing fee

paid to land an airplane at an
airport is traceable to the
particular flight, but it is not
traceable to first-class,
business-class, and
economy-class passengers.
Traceable and Common Costs
10-36

Fixed Don’t allocate

Costs common costs to
segments.

Traceable Common
SEGMENTS DEFINED AS DEPARTMENT

TAX AUDIT CONSULTING

DEPARTMENT DEPARTMENT DEPARTMENT

Department-
specialized
functional
area within
an
organization
SEGMENTS DEFINED AS DIVISIONS
TAX INDIVIDUAL BUSINESS
DEPARTMENT TAX DIVISION TAX DIVISION

Division- is a discrete part of a company that may operate

under the same name and legal responsibility or as a
separate corporate and legal entity under another
business name
SEGMENTS DEFINED AS PRODUCTS
 SEGMENTS DEFINED AS SALES CHANNEL
SALES CHANNEL
ONLINE SALES RETAIL STORES CHEMICALS
SALES 50,000 20,000 70,000

Sales Channel- a way of bringing products or services to the market

• Direct- selling directly to customers
• Indirect- intermediary
 SEGMENT
MARGIN
* measure of profitability
* represents the margin available after a segment has
covered all of its cost

* The BEST GAUGE of the long-run profitability of a

segment
 SEGMENT REVENUES

– VARIABLE COSTS
_____________________________________________________________________________________

CONTRIBUTION MARGIN

– TRACEABLE FIXED COSTS

___________________________________________________________________________________________

SEGMENT MARGIN
 FOR EVALUATION PURPOSES IN
SEGMENT REPORTING, COMMON
COSTS ARE NOT ALLOCATED
Example
Negative
Segment
Margin
 • In making a decision of whether to
continue or discontinue that segment
or product line

• To learn which parts of a total

RELEVANCE business are performing better or

worse than average

• To determine where to invest

additional funds in a business
COST PERFORMANCE REPORT
PROFITABILITY
ANALYSIS
REPORT
 PROFITABILITY ANALYSIS
REPORT
 Measures the amount of profit
earned due to the efficiency of
any operation in a business
 PROFIT CENTER
PERFORMANCE REPORT
 OTHER
SEGMENTED
REPORTS
Segmented Income Statements

 Segment Defined as division

 Segment defined as product lines

of the consumer product division
SEGMENTED DEFINED AS
DIVISION
SEGMENT DEFINED AS
PRODUCT
 BUSINESS SEGMENT
PERFORMANCE REPORT
Sales
- Variable Cost
Contribution Margin
- Controllable Fixed Cost
Performance Margin
- Committed Fixed Costs
Segmented Margin
GAME
A ______ is any part or activity of an
organization about which a manager
seeks cost, revenue, or profit data
ANSWER
SEGMENT
Segmented reporting is required
for..

A. B.
Privately-held Publicly-held
entities entities

D.
C.
None of the
Both a and b
above
 B.
ANSWER Publicly-held
entities
ENUMERATION:

What are the 3 key features of

segmented reporting?
 • Contribution Approach
• Controllable vs. Uncontrollable
ANSWER Expenses/Costs
• Segmented Income
Statement
 A/an ______ cost is not traceable to a particular
cost object; therefore, it only becomes an
expense of the cost object through an allocation
process

A. B.
Direct Indirect
 B.
Benefit received
ANSWER and the
responsibility for
the incurrence of
the expense
What are the two basic guidelines for
allocating indirect fixed expenses?

A. B.
Benefit received
Benefit received and
and the
the probability for
responsibility for
the incurrence of
the incurrence of
the expense
the expense
 B.
Benefit received
ANSWER and the
responsibility for
the incurrence of
the expense
 Represents the margin available
after a segment has covered all of its
cost

A. B.
C.
SEGMENT SEGMENT
SEGMENT
MARGIN REPORTING
 A.

ANSWER SEGMENT
MARGIN
SEGMENT MARGIN IS THE BEST GAUGE OF THE
LONG-RUN PROFITABILITY OF A SEGMENT

TRUE FALSE
ANSWER TRUE
 MEASURES THE AMOUNT OF PROFIT EARNED
DUE TO THE EFFICIENCY OF ANY OPERATION IN
A BUSINESS

A. B.
COST PROFITABILITY
PERFORMANCE ANALYSIS
REPORT REPORT
 B.
PROFITABILITY
ANSWER ANALYSIS
REPORT