Subject: Cost and Management Accounting
Prepare a segmented income statement using the contribution format, and explain the difference between traceable fixed costs and common fixed cost.
Segment reporting and Profitability Analysis
A different kind of income statement is required for evaluating the performance of a profit or investment center, something that emphasizes segments rather than the performance of the company as a whole. A segment is any part or activity of an organization about which a manager seeks cost, revenue, or profit data. A segment can be an individual store, a sales territory and a service center. There are two keys to building segmented income statements:
• A contribution format should be used because it separates fixed from variable costs and it enables the calculation of a contribution margin. • Traceable fixed costs should be separated from common fixed costs to enable the calculation of a segment margin.
Levels of Segmented Statements
Webber, Inc. Divisions
Webber’s defined as Divisions
Webber’s segments defined as Television Division
Webber’s Segments Defined as Sales Channels for One Product Line, Big Screen, of the Television Division
|Income Statement | | |Big Screen |Retail Stores |Catalog Sales | |Sales |100,000 |70,000 |30,000 | |Variable Costs |55,000 |42,000 |13,000 | |CM |45,000 |28,000 |17,000 | |Traceable FC |16,000 |10,000 |6,000 | |Sales Channel margin |29,000 |18,000 |11,000 | |Common costs |7,000 | | | |Product Line Margin |$ 22,000 | | |
Identifying Traceable and Common Fixed Costs
Traceable fixed cost:
A traceable fixed cost is a fixed cost that is incurred because of the existence of a segment. If the segment had never existed, the fixed cost would have not been incurred; and if the segment were eliminated, the fixed cost would disappear. Examples of traceable fixed costs include the following:
• The salary of the Fritos product manager at Pepsi CO. is traceable fixed cost of the Fritos business segment of Pepsi Co. • The liability insurance at Disney World is a traceable fixed cost of the Disney World business segment of the Disney Corporation
Common fixed cost:
A common fixed cost is a fixed cost that supports the operations of more than one segment, but is not traceable in whole or in part to any one segment. Even if a segment were entirely eliminated, there would be no change in true common fixed cost. Examples:
Example of common fixed cost include the following:
• The salary of general manager who controls all the segments. The salary of CEO at general motors is also an example of common fixed cost. No single segment can be regarded as the sole reason of this cost. • The salary of receptionist at an office shared by a number of doctors is a common fixed cost of the doctors. The cost is traceable to the office, but not to any one of the doctors individually. Identifying traceable and common fixed costs is crucial in segment reporting, since the traceable fixed costs are charged to the segments and common fixed costs are not charged...