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Segment Reporting - CV - YouTube
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chapter 6
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segment reporting hello all
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as promised this video covers the
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concepts to be learned
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in the second half of chapter six
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this will be short and sweet
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the topic covered is segment reporting
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the must know includes one knowing the
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difference between
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traceable fixed cost and common fixed
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costs
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two knowing the difference between
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segment contribution margin
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segment margin and net operating income
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three knowing how to prepare
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segment income statements
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let's start off by talking about
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organization types
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you know organizations can be broken
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into two types of categories
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either centralized organizations
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or decentralized organizations in a
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centralized organization
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the executive management basically makes
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all decisions
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this type of structure is typically good
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for small companies offering a single
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product
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as businesses grow management of the
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organization becomes
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more and more difficult most of the
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large
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businesses are decentralized meaning
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that
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authority make decisions is spread
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throughout the business itself
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as business entities become more and
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more complex the management of these
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firms
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often find it useful to divide the
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company into segments
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in order to enhance their managerial
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planning and control over operation
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segments usually are based on
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organization units
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like divisions or departments or areas
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of economic activity
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like geographic regions or product lines
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many large companies have found that
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segmentation by
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organizational unit is the approach that
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proves to be most useful
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it's important that managerial
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accounting systems and procedures
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that develop information for planning
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and control decisions
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be structured to reflect the segments
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that the business operates in
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before we go any further let's make sure
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you know what a segment is
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a segment is a part or activity of an
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organization about which managers would
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like cost
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revenue or profit data examples of
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segments are division
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sales territories individual stores
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service centers manufacturing plants
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marketing departments
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individual customers and product lines
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on this slide i give you an example of
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the segments that would work for apple
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apple could have divisions and the
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divisions could be broken down into
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product segments
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or service segments the product segments
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could be broken down further into iphone
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ipad and mac
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the services could be broken down into
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apple care or apple pay
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these are all segments geographically
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they could be broken down into america
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europe asia sales territory within the
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americas could be
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a north south east or west segment
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and then finally delivery channels could
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be segmented into in-store and online
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so how far we want to segment a company
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depends on the kind of information we
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need
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to move forward when businessmen talk
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about
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segments they typically break them down
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into four types
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they're either revenue centers cost
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centers profit center
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or investment center the manager of a
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revenue
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center is responsible for sales only
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he's not held accountable for
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controlling costs
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and an example here would be the sales
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manager
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on the other hand the manager of a cost
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center is responsible for controlling
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costs
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in examples here would be the manager of
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the accounting department
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the manager of hr the manager of
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information systems
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a manager of a profit center is
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responsible for revenues for controlling
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costs
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and overall profitability
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managers of profit centers are held
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accountable
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by comparing actual profitability
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to budget profitability so an example
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here would be if you were the manager of
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a retail location
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the manager of an investment center is
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responsible for
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revenue controlling costs profits
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and investing in assets what type of
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assets
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it might be security portfolio it might
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be in new locations
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i might be in new equipment
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in this individual's case actual returns
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are compared to budget
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so again an example would be the
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regional manager
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for a retail location
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internal reporting of segment operations
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deals
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primarily with the measurement of
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operating performance
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of the segments involved as a result
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segmented reports usually take the
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format
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of a contribution margin income
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statement
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contribution margin income statement
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allows managers
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to identify those costs that are
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controllable
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by the segment and for which a segment
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manager should be held
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accountable for
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the use of a contribution margin income
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statement requires management to
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segregate those costs
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that are attributable to the segment
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from those class
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that are attributable to other segments
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department managers should be held
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responsible only for
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costs and expenses that they control
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therefore in segment reporting costs are
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commonly classified and reported
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as traceable cost or common cost
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traceable expenses are those operating
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expenses or costs
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traceable to and incurred for the
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benefit of a single department
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or a single segment and thus ordinarily
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controllable
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by that department or segment
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common expenses are those operating
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expenses
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or costs incurred for the benefit
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of multiple departments and thus neither
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traceable to
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nor controllable by a specific
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department
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it's important to realize that fixed
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costs can be either traceable costs or
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common costs
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it's important also to realize that
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we will only hold managers of segments
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responsible for those
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costs that are traceable to their
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operations
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it's important to recognize that common
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cost should not be allocated
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to the different segments
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as you can be seen on this slide
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building the contribution
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format income statement is similar to
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what we've been doing all along
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you are going to take your sales you're
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going to subtract your variable costs
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but now you're going to have a segmented
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contribution margin
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following the segmented contribution
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margin
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are the traceable fix expenses
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once you subtract the traceable fixed
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expenses
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from the segment contribution margin you
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get the segment margin
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from the segment margin you'll subtract
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common fixed
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expenses to get the net operating income
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so the big differences here are the term
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segment contribution margin
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the second is traceable fix expenses
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then third segment margin
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common fix expenses
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and then ultimately we get to our net
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operating income
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the financial statement is similar to
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what we've done before
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but now what we've done is we've added
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columns
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for each of our segments so again
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those segments one two and three would
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be
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product a product b product c
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it could be the north division the south
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the east division it could be
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online services in-store services
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so the segments can be whatever we're
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drilling down to
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to get good data for on our operations
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once you input the data for each
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segments
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then the total is just the sum of each
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of those columns
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so the sales total would be the sum of
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sales for segment one two and three
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variable product costs same thing
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variable period
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cost exactly the same thing then the
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segmented contribution margin
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is the total of the contribution margins
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for
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each of the segments the traceable fix
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expenses
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is the total of all traceable expenses
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in each of the segments and then the
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segment margin
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same thing it's the total of the segment
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margin
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for each of the segments at that point
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though
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you're finished with the segment part of
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the report
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the only thing that's left is to
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subtract common fix expenses
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from the segment margin to get the net
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operating income
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you notice that the common fix expenses
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are not allocated to any of the segments
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because we could not effectively
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trace them to each of those areas
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so the segment margin again is computed
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by subtracting
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the traceable fixed costs of a segment
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from its contribution margin the segment
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margin itself
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is referred to as the best gauge of
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long-term profitability for the segment
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so when looking at segments that's what
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you're looking at
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once a company prepares a contribution
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format segmented income statement
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it can use the statement to make
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decisions and perform break-even
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analysis
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because we just recently studied
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break-even analysis
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let's see how it would apply to this
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statement
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if we wanted to know the break-even
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dollars for the company as a whole
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in the numerator we would have to add
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the total traceable fixed expenses to
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the total common fix expenses
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and then divide that by the overall
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company
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contribution margin ratio
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if we wanted to determine the break-even
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dollars for each segment
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we would take the segment's traceable
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fix
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expenses and divide it by the segment's
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contribution margin ratio
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well that's it i told you this would be
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short and sweet
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so the key here is to recognize and
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understand
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what a segment is second to understand
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the difference between
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traceable fixed costs and common fixed
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costs
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to understand that it'd be a mistake to
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allocate common fix expenses to segments
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because they can't be traceable and they
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don't really
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impact the performance of a specific
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segment in other words if that
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segment was gone that common expense
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would still exist where when we talk
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about traceable fixed
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expenses if the segment's gone so are
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all the
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traceable fixed expenses that go with it
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and then last of all it's to make sure
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you're understanding the difference
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between
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the segment contribution margin the
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segment margin
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done with another chapter thanks for
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watching the video
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time to do some drills with segment
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reporting
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good luck
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