University:
California State University, Northridge
Course:
ACCT 230 | Introduction to Managerial Accounting
Academic year:

2024
Views:

457

Pages:

20
Author:

Shyanne Johnson

Chapter 10 Segment Reporting, Decentralization, and the Balanced Scorecard Part 2 10-22 Levels of Segmented Statements Webber, Inc. has two divisions. Webber, Inc. Computer Division Television Division Let’s look more closely at the Television Division’s income statement. 10-23 Levels of Segmented Statements Our approach to segment reporting uses the contribution format. Income Statement Contribution Margin Format Television Division Sales $ 300,000 Variable COGS 120,000 Other variable costs 30,000 Total variable costs 150,000 Contribution margin 150,000 Traceable fixed costs 90,000 Segment margin $ 60,000 Cost of goods sold consists of variable manufacturing costs. Fixed and variable costs are listed in separate sections. 10-24 Levels of Segmented Statements Our approach to segment reporting uses the contribution format. Income Statement Contribution Margin Format Television Division Sales $ 300,000 Variable COGS 120,000 Other variable costs 30,000 Total variable costs 150,000 Contribution margin 150,000 Traceable fixed costs 90,000 Segment margin $ 60,000 Contribution margin is computed by taking sales minus variable costs. Segment margin is Television’s contribution to profits. 10-25 Levels of Segmented Statements Income Statement Company Television Sales $ 500,000 $ 300,000 Variable costs 230,000 150,000 CM 270,000 150,000 Traceable FC 170,000 90,000 Segment margin 100,000 $ 60,000 Common costs Net operating income Computer $ 200,000 80,000 120,000 80,000 $ 40,000 10-26 Levels of Segmented Statements Income Statement Company Television Computer Sales $ 500,000 $ 300,000 $ 200,000 Variable costs 230,000 150,000 80,000 CM 270,000 150,000 120,000 Traceable FC 170,000 90,000 80,000 Segment margin 100,000 $ 60,000 $ 40,000 Common costs 25,000 Common costs should not Net operating be allocated to the income $ 75,000 divisions. These costs would remain even if one of the divisions were eliminated. 10-27 Traceable Costs Can Become Common Costs As previously mentioned, fixed costs that are traceable to one segment can become common if the company is divided into smaller segments. Let’s see how this works using the Webber, Inc. example! 10-28 Traceable Costs Can Become Common Costs Webber’s Television Division Television Division LCD Plasma Product Lines 10-29 Traceable Costs Can Become Common Costs Income Statement Television LCD Division Sales $ 200,000 Variable costs 95,000 CM 105,000 Traceable FC 45,000 Product line margin $ 60,000 Common costs Divisional margin Plasma $ 100,000 55,000 45,000 35,000 $ 10,000 We obtained the following information from the LCD and Plasma segments. 10-30 Traceable Costs Can Become Common Costs Income Statement Television LCD Division Sales $ 300,000 $ 200,000 Variable costs 150,000 95,000 CM 150,000 105,000 Traceable FC 80,000 45,000 Product line margin 70,000 $ 60,000 Common costs 10,000 Divisional margin $ 60,000 Plasma $ 100,000 55,000 45,000 35,000 $ 10,000 Fixed costs directly traced to the Television Division $80,000 + $10,000 = $90,000 10-31 External Reports The Financial Accounting Standards Board now requires that companies in the United States include segmented financial data in their annual reports. 1. Companies must report segmented results to shareholders using the same methods that are used for internal segmented reports. 2. Since the contribution approach to segment reporting does not comply with GAAP, it is likely that some managers will choose to construct their segmented financial statements using the absorption approach to comply with GAAP. 10-32 Omission of Costs Costs assigned to a segment should include all costs attributable to that segment from the company’s entire value chain. Business Functions Making Up The Value Chain R&D Product Design Customer Manufacturing Marketing Distribution Service 10-33 Inappropriate Methods of Allocating Costs Among Segments Failure to trace costs directly Segment 1 Segment 2 Inappropriate allocation base Segment 3 Segment 4 10-34 Common Costs and Segments Common costs should not be arbitrarily allocated to segments based on the rationale that “someone has to cover the common costs” for two reasons: 1. This practice may make a profitable business segment appear to be unprofitable. 2. Allocating common fixed costs forces managers to be held accountable for costs they cannot control. Segment 1 Segment 2 Segment 3 Segment 4 10-35 Quick Check  Income Statement Sales Variable costs CM Traceable FC Segment margin Common costs Profit Hoagland's Lakeshore $ 800,000 310,000 490,000 246,000 244,000 200,000 $ 44,000 Bar $ 100,000 60,000 40,000 26,000 $ 14,000 Restaurant $ 700,000 250,000 450,000 220,000 $ 230,000 Assume that Hoagland's Lakeshore prepared its segmented income statement as shown. 10-37 Quick Check  How much of the common fixed cost of $200,000 can be avoided by eliminating the bar? a. None of it. b. Some of it. c. All of it. A common fixed cost cannot be eliminated by dropping one of the segments. 10-39 Quick Check  Suppose square feet is used as the basis for allocating the common fixed cost of $200,000. How much would be allocated to the bar if the bar occupies 1,000 square feet and the restaurant 9,000 square feet? a. $20,000 b. $30,000 c. $40,000 d. $50,000 The bar would be allocated 1/10 of the cost or $20,000. 10-40 Quick Check  If Hoagland's allocates its common costs to the bar and the restaurant, what would be the reported profit of each segment? 10-41 Allocations of Common Costs Income Statement Sales Variable costs CM Traceable FC Segment margin Common costs Profit Hoagland's Lakeshore $ 800,000 310,000 490,000 246,000 244,000 200,000 $ 44,000 Bar $ 100,000 60,000 40,000 26,000 14,000 20,000 $ (6,000) Restaurant $ 700,000 250,000 450,000 220,000 230,000 180,000 $ 50,000 Hurray, now everything adds up!!! 10-43 Quick Check  Should the bar be eliminated? a. Yes The profit was $44,000 before eliminating the bar. If we eliminate b. No the bar, profit drops Income Statement Sales Variable costs CM Traceable FC Segment margin Common costs Profit Hoagland's Lakeshore $ 700,000 250,000 450,000 220,000 230,000 200,000 $ 30,000 Bar to $30,000! Restaurant $ 700,000 250,000 450,000 220,000 230,000 200,000 $ 30,000