Segment Reporting (Overview)

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Segment Reporting (Overview)

• David B. Hamm, MBA, CPA
• Managerial Accounting
• OVC, Fall, 2002

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Segment Reporting (1)

• Many firms today offer multiple products or are
  conglomerates of divisions or other entities
  selling differentiated products or services.

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Segment Reporting (2)

• Sometimes this is done to capitalize on seasonal
  activities and seasonal cash flows (offsetting
  downtime of one product with another products
  uptime)

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Segment Reporting (3)

• Segment reporting (required by FASB) divides the
  consolidated financial statements into
  respective segments so that the operations and
  profitability of each part of the whole may be
  evaluated individually.
• Costs clearly identifiable to a segment should be
  reported to that segment

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Segment Reporting (4)

• What about common costs
• Costs not readily identifiable with a particular
  segment, but more to the entire organization
• Top management
• Corporate accounting
• Corporate-wide marketing, etc.
• Segment reporting provides that only those costs
  directly attributable to a segment be assigned to
  the segment

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Segment Reporting (5)

• Costs that are truly common costsnot
  attributable to one segmentshould be allocated
  to the company as a whole and not charged to the
  segment.
• By allocating only controllable costs to a
  segment, we can see how well it is functioning
  and if there is a sufficient segment margin to
  contribute to joint company operations.

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Example (1)
In the above statement, all fixed costs were
allocated jointly at 50 to each segment,
creating a loss for Segment A
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Example (2)
By allocating FC between segment related costs
and common fixed costs, we can see that Segment A
is, by itself, profitable and contributes more to
common income than Segment B.
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Class Exercise
Pause here for class exercise illustrating
segment reporting