PREPARE A SEGMENTED INCOME

STATEMENT THAT DIFFERENTIATES

TRACEABLE FIXED COSTS FROM COMMON
FIXED COSTS AND USE IT TO MAKE
DECISIONS.

Perdizo, Miljane P.
1. A SEGMENT IS A PART OR ACTIVITY OF AN ORGANIZATION
ABOUT WHICH MANAGERS WOULD LIKE COST, REVENUE, OR
PROFIT DATA. EXAMPLES OF SEGMENTS INCLUDE SALES
TERRITORIES, INDIVIDUAL STORES, AND SERVICE CENTERS.
 
 There are two keys to building segmented income statements.
 1. A contribution format should be used.
 2. Traceable fixed costs should be separated from common fixed costs to enable the
calculation of a segment margin.
 A traceable fixed cost of a segment is a fixed cost that is incurred because of the
existence of the segment. If the segment were eliminated, the traceable fixed cost would
disappear.
 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.
 The traceable fixed costs of one segment may be a common fixed cost of lower-level
segments.
 A segment margin is computed by subtracting the traceable fixed costs of a segment
from its contribution margin. To assess the long-run profitability of a segment, common
costs should not be allocated to segments.
Example:
1. Assume that Webber, Inc. has two
divisions: the Computer Division and the
Television Division
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

Division margin 100,000 60,000 40,000

Common costs 25,000    

Net operating income 75,000    

2. Assume that the Television Division has two product lines: Regular
and Big Screen.
Income Statement

  Television Division Regular Big Screen

Sales 300,000 200,000 100,000

Variable costs 150,000 95,000 55,000

CM 150,000 105,000 45,000

Traceable FC 80,000 45,000 35,000

Product line margin 70,000 60,000 10,000

Common costs 10,000    

Net operating income 60,000    

Assume that Haglund’s Lakeshore prepared the segmented
income statement as shown:

Income Statement

  Company Bar Restaurant

Sales 800,000 100,000 700,000

Variable costs 310,000 60,000 250,000

CM 490,000 40,000 450,000

Traceable FC 246,000 26,000 220,000

Product line margin 244,000 14,000 230,000

Common costs 200,000    

Net operating income 44,000