Анализ и подготовка отчетов по сегментам в финансовом учете
SEGMENTAL REPORTING
A segment is a unit of an organization for which a measure is required for performance evaluation.
A segment can be a department, a process, a product, geographical market etc.
It is usually not possible for a user of financial statements to make judgment about the nature of the
different activities carried out by an enterprise or to understand their contribution to the overall
performance of the company unless some segmental analysis of the company is done.
The objective of segmental reporting is to explain further the profitability of each segment.
Controllability is important such that only those items controllable by the segment should be charged
while common cost should be charged to the parent segment or division.
Effective decentralization requires segmented reporting.
How to Prepare Segmented Income Statements
1) Use contribution approach i.e. sales – Variable costs
2) Less identifiable traceable fixed cost
3) Less common fixed cost
Traceable Fixed Costs
There are fixed costs incurred because of existence of the segment. i.e. fixed cost identified with the
segment such that if the segment is eliminated, the fixed cost will disappear. These are also known as
specific fixed costs.
Common Fixed Costs
Are fixed costs that support more than one segment and not identifiable with any segment.
If a segment is eliminated, the cost will continue to be incurred. They are also known as general fixed
costs charged against total income of the entire company.
ILLUSTRATION
A company has two divisions; the following is a segmented income statement for the last
month
Details Total
Sh.
Cloth division
Sh.
Leather division
Sh.
Sales 3,500,000 200,000 1,500,000
Variable cost (1,721000) (960,000) (761,000)
170
Contribution 1 ,779 000 1 040 000 739 000
Less traceable F. cost
Advertising 612 000 300 000 312 000
Administration 427 000 210 000 217 000
Depreciation 229 000 115 000 114 000
Divisional segment margin 511 000 415 000 96 000
Common Fixed cost (390 000)
Net operating income 121 000
The management questions the low margin in leather division while the division has 25% less sales
than cloth division. The management has directed that leather division be further segmented into
product lines as follows:
Details Garments
Sh.
Shoes
Sh.
Handbags
Sh.
Sales 500 000 700 000 300 000
Traceable F. cost
Advertising 80 000 112 000 120 000
Administration 30 000 35 000 42 000
Depreciation 25 000 56 000 33 000
Variable cost as a % of sales 65% 40% 52%
Analysis shows that sh. 110 000 of leather divisions’ admin expenses are common to the product line.
Required;
Prepare a contribution format segmented income statement for leather division with segment defined
as product lines.
SOLUTION
Contribution income statement
Details Leather
division
Shs.
Garment
segment
Shs.
Shoes
segment
Shs.
Handbag
segment
Shs.
Sales 1 500 000 500 000 700 000 300 000
Less: Variable costs (761 000) (325 000) (280 000) (156 000)
Contribution margin 739 000 175 000 420 000 144 000
Less: traceable F. cost
Advertising 312 000 80 000 112 000 120 000
Administration 107 000 30 000 35 000 42 000
Depreciation 114 000 25 000 56 000 33 000
Segmental margin 206 000 40 000 217 000 (51 000)
Less: common F. cost (110 000)
96 000
a) The management is surprised by handbag product line poor showing and would like to have the
product segmented by market as follows:
171
Details Domestic Foreign
Sales 200 000 100 000
Traceable F. cost
Advertising 40 000 80 000
Variable cost as % of sales 43% 70%
All the handbags product line administration and depreciation are common to the market
Required: prepare a contribution format segmented income statement for handbag product with
segments defined as markets.
SOLUTION
Contribution income statement
Details Handbags product Domestic segment Foreign segment
Sales 300 000 200 000 100 000
Less: Variable costs 156 000 43% 200 000
= 86 000
70% 100 000
70 000
Contribution margin 144 000 114 000 30 000
Less: traceable F. cost (120 000) (40 000) (80 000)
Segmental margin 24 000 74 000 (50 000)
Less: common F. cost
Admin & depreciation (75 000)
Product loss (51 000)
b) Referring to the statement prepared in (a) above the sales manager want to run a special
promotion campaign on one of product line over the next month. A marketing study indicates
such a campaign would increase sales of the garment line by sh. 200 000 or sale of the shoe
product line by sh. 145 000. The campaign would cost sh. 30 000.
Required:
Show computation to determine which product line should be chosen
SOLUTION
Details Garment line
Sh.
Shoe line
Sh.
Sales 700 000 845 000
Less: Variable costs (455 000) (338 000)
Contribution 245 000 507 000
Less: traceable Fixed cost
Advertising 110 000 142 000
Administration 30 000 35 000
Depreciation 25 000 56 000
Product line contribution 80 000 274 000
Incremental Margin Ratio
Garment 80 000 – 40 000 = 40 000
Shoe 274 000 – 217 000 = 57 000 Absolute term
172
Relative terms
Garment 100 100 %
40 000
40 000
x =
Shoe 100 26 %
217 000
57 000
x =
Advantages of Segmental Reporting
(i) It helps in understanding the past performance and the future performance of each segment in
terms of profitability.
(ii) It helps in assessing the risks and returns of each segment thus enhancing management’s
capability in developing risk mitigation strategies.
(iii) It helps in making informed judgment about each segment in terms of opportunities for growth.
(iv) Can be used by management for decision making especially in committing more financial
resources to more profitable segments and or cutting down the sizes or shutting down the nonprofitable segments.
Disadvantages of Segmental Reporting
(i) It is difficult to identify primary segments for reporting especially if the company operates in
both classes of business and geographical segment.
(ii) It is difficult to allocate or apportion the common items among the segments especially those
which relate to the overall corporate strategy e.g. finance cost.
(iii) There is a problem of measuring performance especially if the segments trade with each other.
(iv) Segment information disclosed for external purposes may be an advantage to the competitors
since they may use the information to harm the business
A segment is a unit of an organization for which a measure is required for performance evaluation.
A segment can be a department, a process, a product, geographical market etc.
It is usually not possible for a user of financial statements to make judgment about the nature of the
different activities carried out by an enterprise or to understand their contribution to the overall
performance of the company unless some segmental analysis of the company is done.
The objective of segmental reporting is to explain further the profitability of each segment.
Controllability is important such that only those items controllable by the segment should be charged
while common cost should be charged to the parent segment or division.
Effective decentralization requires segmented reporting.
How to Prepare Segmented Income Statements
1) Use contribution approach i.e. sales – Variable costs
2) Less identifiable traceable fixed cost
3) Less common fixed cost
Traceable Fixed Costs
There are fixed costs incurred because of existence of the segment. i.e. fixed cost identified with the
segment such that if the segment is eliminated, the fixed cost will disappear. These are also known as
specific fixed costs.
Common Fixed Costs
Are fixed costs that support more than one segment and not identifiable with any segment.
If a segment is eliminated, the cost will continue to be incurred. They are also known as general fixed
costs charged against total income of the entire company.
ILLUSTRATION
A company has two divisions; the following is a segmented income statement for the last
month
Details Total
Sh.
Cloth division
Sh.
Leather division
Sh.
Sales 3,500,000 200,000 1,500,000
Variable cost (1,721000) (960,000) (761,000)
170
Contribution 1 ,779 000 1 040 000 739 000
Less traceable F. cost
Advertising 612 000 300 000 312 000
Administration 427 000 210 000 217 000
Depreciation 229 000 115 000 114 000
Divisional segment margin 511 000 415 000 96 000
Common Fixed cost (390 000)
Net operating income 121 000
The management questions the low margin in leather division while the division has 25% less sales
than cloth division. The management has directed that leather division be further segmented into
product lines as follows:
Details Garments
Sh.
Shoes
Sh.
Handbags
Sh.
Sales 500 000 700 000 300 000
Traceable F. cost
Advertising 80 000 112 000 120 000
Administration 30 000 35 000 42 000
Depreciation 25 000 56 000 33 000
Variable cost as a % of sales 65% 40% 52%
Analysis shows that sh. 110 000 of leather divisions’ admin expenses are common to the product line.
Required;
Prepare a contribution format segmented income statement for leather division with segment defined
as product lines.
SOLUTION
Contribution income statement
Details Leather
division
Shs.
Garment
segment
Shs.
Shoes
segment
Shs.
Handbag
segment
Shs.
Sales 1 500 000 500 000 700 000 300 000
Less: Variable costs (761 000) (325 000) (280 000) (156 000)
Contribution margin 739 000 175 000 420 000 144 000
Less: traceable F. cost
Advertising 312 000 80 000 112 000 120 000
Administration 107 000 30 000 35 000 42 000
Depreciation 114 000 25 000 56 000 33 000
Segmental margin 206 000 40 000 217 000 (51 000)
Less: common F. cost (110 000)
96 000
a) The management is surprised by handbag product line poor showing and would like to have the
product segmented by market as follows:
171
Details Domestic Foreign
Sales 200 000 100 000
Traceable F. cost
Advertising 40 000 80 000
Variable cost as % of sales 43% 70%
All the handbags product line administration and depreciation are common to the market
Required: prepare a contribution format segmented income statement for handbag product with
segments defined as markets.
SOLUTION
Contribution income statement
Details Handbags product Domestic segment Foreign segment
Sales 300 000 200 000 100 000
Less: Variable costs 156 000 43% 200 000
= 86 000
70% 100 000
70 000
Contribution margin 144 000 114 000 30 000
Less: traceable F. cost (120 000) (40 000) (80 000)
Segmental margin 24 000 74 000 (50 000)
Less: common F. cost
Admin & depreciation (75 000)
Product loss (51 000)
b) Referring to the statement prepared in (a) above the sales manager want to run a special
promotion campaign on one of product line over the next month. A marketing study indicates
such a campaign would increase sales of the garment line by sh. 200 000 or sale of the shoe
product line by sh. 145 000. The campaign would cost sh. 30 000.
Required:
Show computation to determine which product line should be chosen
SOLUTION
Details Garment line
Sh.
Shoe line
Sh.
Sales 700 000 845 000
Less: Variable costs (455 000) (338 000)
Contribution 245 000 507 000
Less: traceable Fixed cost
Advertising 110 000 142 000
Administration 30 000 35 000
Depreciation 25 000 56 000
Product line contribution 80 000 274 000
Incremental Margin Ratio
Garment 80 000 – 40 000 = 40 000
Shoe 274 000 – 217 000 = 57 000 Absolute term
172
Relative terms
Garment 100 100 %
40 000
40 000
x =
Shoe 100 26 %
217 000
57 000
x =
Advantages of Segmental Reporting
(i) It helps in understanding the past performance and the future performance of each segment in
terms of profitability.
(ii) It helps in assessing the risks and returns of each segment thus enhancing management’s
capability in developing risk mitigation strategies.
(iii) It helps in making informed judgment about each segment in terms of opportunities for growth.
(iv) Can be used by management for decision making especially in committing more financial
resources to more profitable segments and or cutting down the sizes or shutting down the nonprofitable segments.
Disadvantages of Segmental Reporting
(i) It is difficult to identify primary segments for reporting especially if the company operates in
both classes of business and geographical segment.
(ii) It is difficult to allocate or apportion the common items among the segments especially those
which relate to the overall corporate strategy e.g. finance cost.
(iii) There is a problem of measuring performance especially if the segments trade with each other.
(iv) Segment information disclosed for external purposes may be an advantage to the competitors
since they may use the information to harm the business
The provided text is a comprehensive explanation of segmental reporting in management accounting. Here's a breakdown of the key concepts and the illustrated examples:
Segmental Reporting
Definition: A segment is a part of an organization (e.g., a department, product line, geographical region) for which performance measurement is needed.
Objective: To provide insights into the profitability of individual segments, helping stakeholders understand their contribution to the overall company performance.
Key Principle: Controllability:
* Only costs directly controllable by the segment's management should be allocated to it.
* Common costs (shared across multiple segments) are typically allocated to a parent segment or the company as a whole.
Effective Decentralization: Segmental reporting is crucial for effective decentralized decision-making.
Preparing Segmented Income Statements
The contribution approach is generally used:
- Sales
- Less: Variable Costs
- = Contribution Margin
- Less: Identifiable Traceable Fixed Costs (Costs that disappear if the segment is eliminated)
- = Segment Margin
- Less: Common Fixed Costs (Costs that continue even if a segment is eliminated)
- = Net Operating Income
Types of Fixed Costs:
- Traceable Fixed Costs (Specific Fixed Costs): Incurred specifically because of the segment's existence. If the segment is removed, these costs disappear.
- Common Fixed Costs (General Fixed Costs): Support multiple segments and cannot be identified with a single one. They are incurred by the company as a whole.
Illustrations and Solutions
Illustration 1: Leather Division Segmentation
The management questioned the low profitability of the Leather Division despite having lower sales than the Cloth Division. They decided to segment the Leather Division by its product lines: Garments, Shoes, and Handbags.
Requirements: Prepare a contribution-format segmented income statement for the Leather Division, breaking it down by product line.
Solution (Provided in the text):
| Details | Leather Division (Shs.) | Garment Segment (Shs.) | Shoes Segment (Shs.) | Handbag Segment (Shs.) |
|---|---|---|---|---|
| Sales | 1,500,000 | 500,000 | 700,000 | 300,000 |
| Less: Variable Costs | (761,000) | (325,000) | (280,000) | (156,000) |
| Contribution Margin | 739,000 | 175,000 | 420,000 | 144,000 |
| Less: Traceable Fixed Costs | ||||
| Advertising | 312,000 | 80,000 | 112,000 | 120,000 |
| Administration | 107,000 | 30,000 | 35,000 | 42,000 |
| Depreciation | 114,000 | 25,000 | 56,000 | 33,000 |
| Segmental Margin | 206,000 | 40,000 | 217,000 | (51,000) |
| Less: Common Fixed Costs (Leather Admin) | (110,000) | |||
| Net Segment Income | 96,000 |
- Note: The calculation for variable costs for each segment is based on the provided percentages of sales (e.g., Garments: 65% of 500,000 = 325,000).
Illustration 2: Handbag Product Segmentation by Market
The Handbag product line showed a loss. Management wants to further segment it by market (Domestic and Foreign).
Requirements: Prepare a contribution-format segmented income statement for the Handbag product, segmented by market.
Solution (Provided in the text):
| Details | Handbags Product (Shs.) | Domestic Segment (Shs.) | Foreign Segment (Shs.) |
|---|---|---|---|
| Sales | 300,000 | 200,000 | 100,000 |
| Less: Variable Costs | (156,000) | (86,000) | (70,000) |
| Contribution Margin | 144,000 | 114,000 | 30,000 |
| Less: Traceable Fixed Costs | |||
| Advertising | 120,000 | 40,000 | 80,000 |
| Segmental Margin | 24,000 | 74,000 | (50,000) |
| Less: Common Fixed Costs (Handbag Admin & Depreciation) | (75,000) | ||
| Product Loss | (51,000) |
- Note:
- Variable costs are calculated as percentages of sales for each market.
- Administration and depreciation for the Handbag product are considered common fixed costs at this market segmentation level.
Illustration 3: Special Promotion Campaign Decision
The sales manager wants to run a promotion for either the Garment or Shoe product line.
Requirements: Show the computation to determine which product line should be chosen for the promotion.
Solution (Provided in the text):
This part of the solution seems to be a comparison of potential profitability increases from a promotion. It calculates the incremental contribution or margin.
-
Garment Line:
- Potential Sales Increase: Sh. 200,000
- Variable Cost %: 65%
- Variable Cost on Increase: 0.65 * 200,000 = 130,000
- Incremental Contribution: 200,000 - 130,000 = 70,000
- Less Promotion Cost: 30,000
- Net Incremental Profit (Garment): 70,000 - 30,000 = 40,000
-
Shoe Line:
- Potential Sales Increase: Sh. 145,000
- Variable Cost %: 40%
- Variable Cost on Increase: 0.40 * 145,000 = 58,000
- Incremental Contribution: 145,000 - 58,000 = 87,000
- Less Promotion Cost: 30,000
- Net Incremental Profit (Shoe): 87,000 - 30,000 = 57,000
Conclusion: Based on these calculations, the promotion should be run on the Shoe line as it is expected to generate a higher incremental profit (Sh. 57,000) compared to the Garment line (Sh. 40,000).
- The "Incremental Margin Ratio" and relative calculations in the provided text seem to be different or possibly mislabeled/confusingly presented compared to a standard incremental profit analysis. The direct calculation of net incremental profit is clearer.
Advantages of Segmental Reporting
- Performance Understanding: Helps in analyzing past and future performance of each segment.
- Risk Assessment: Aids in evaluating risks and returns of segments, enabling better risk management strategies.
- Growth Opportunities: Facilitates informed judgments about growth potential in different segments.
- Decision Making: Supports management decisions on resource allocation (investing in profitable segments, reducing or closing unprofitable ones).
Disadvantages of Segmental Reporting
- Segment Identification: Difficulty in determining primary segments, especially for companies with diverse operations (business and geographical).
- Common Cost Allocation: Challenges in fairly allocating common costs across segments.
- Performance Measurement: Issues in measuring performance, particularly when segments engage in inter-segmental trading.
- Competitive Disadvantage: External disclosure of segmental data can be advantageous to competitors.
Варианты продолжения:
1
Explain Controllability
1
Show Allocation Methods
1
Advantages/Disadvantages
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