Segment Reporting and Performance Evaluation
Practice As You Learn
Cost Accounting
Follow these steps when preparing a segment income statement:
1) Sort the costs between fixed and variable
2) Determine total variable costs by multiplying cost per unit x # of units sold.
Variable costs will always be traceable/direct
3) Sort fixed costs between traceable/direct and nontraceable/common/allocated
Traceable/direct is reported in each segment column
Nontraceable/common/allocated are not reported for each segment, they are reported in the total company column only
4) Write the format and drop in numbers determined in steps 1) through 3)
Memorize this format:
Sales
– Variable cost of production
– Variable period costs
= Contribution Margin
– Traceable / fixed costs
= Division segment margin (profit)
– Common / nontraceable costs
= Total company operating income
Performance Evaluation:
You must memorize the formulas.
Write the formulas and drop in the numbers:
Return on Investment =
Operating Income
Average Operating Assets
Operating Income X Sales
Sales Average Operating Assets
“Profit Margin” “Asset Turnover”
Net Operating Income is: income before interest expense and tax expense
Average Operating Assets = beginning + ending / 2
Long term assets are considered at book value, not fair market value
Residual Income:
Actual Operating Income
– Required Operating Income (see below)
= Residual Income
Average Operating Assets
X Required Rate of Return %
= Required Operating Income
Segment Reporting – Practice as You Learn – Problem 1.
A manufacturing company produces and markets two product lines: Stick Glue and Bottled Glue. The following data was gathered on activities for the month:
| Stick | Bottled | |
| Sales in units | 150,000 | 150,000 |
| Variable selling expense per unit | $0.50 | $ 0.12 |
| Traceable fixed selling expenses | $ 10,000 | $15,000 |
| Variable production cost per unit | $1 | $ 0.45 |
| Allocated non traceable selling expenses | $ 28,000 | $28,000 |
| Sales price per unit | $4 | $ 2.50 |
| Traceable fixed production cost | $200,000 | $300,000 |
| Allocated corporate expenses | $120,000 | $120,000 |
| Non traceable allocated production costs | $ 45,000 | $45,000 |
Prepare a segment income statement for the total company.
Answer
Follow the steps given.
1) Sort the costs between fixed and variable
Variable
Variable production cost per unit
Variable selling expense per unit
“Per unit” is always variable
Fixed
Traceable fixed selling expenses
Allocated non traceable selling expenses
Traceable fixed production cost
Allocated corporate expenses
Non traceable allocated production costs
Assume fixed cost if it does not say variable or does not give a cost per unit.
2) Determine the total variable costs by multiplying cost per unit x # of units.
All variable costs are traceable / direct
Variable production cost per unit:
Stick Bottled
150,000 150,000
x $ 1 x $.45
$150,000 $67,500
Variable selling expense per unit:
Stick Bottled
150,000 150,000
x $.50 x $.12
$75,000 $ 18,000
3) Sort fixed costs between traceable/direct and nontraceable/common/allocated
| Traceable/direct: | Stick: | Bottled: |
| Traceable fixed selling expenses | $ 10,000 | $ 15,000 |
| Traceable fixed production cost | $200,000 | $300,000 |
Report for each segment in the segment column
| Nontraceable/common/allocated: | Stick: | Bottled: | Total: |
| Allocated non traceable selling expenses | $ 28,000 | $ 28,000 | $ 56,000 |
| Allocated corporate expenses | 120,000 | $120,000 | $240,000 |
| Non traceable allocated production costs | $ 45,000 | $ 45,000 | $ 90,000 |
Show total in the total company column only
4) Write the format and drop in numbers determined in steps 1) through 3)
First, drop in amounts in the segment columns. Second, put in common / nontraceable only in the total company column. Total all rows to get the total company operating income.
| Stick | Bottled | Total Company | |
| Sales | $600,000 | $375,000 | $975,000 |
| – Variable cost of production | $150,000 | $67,500 | $217,500 |
| – Variable period costs | $75,000 | $18,000 | $93,000 |
| = Contribution Margin | $375,000 | $289,500 | $664,500 |
| – Traceable fixed costs: | |||
| Traceable fixed selling expenses | $10,000 | $15,000 | $25,000 |
| Traceable fixed production cost | $200,000 | $300,000 | $500,000 |
| = Division segment margin (profit) | $165,000 | ($25,500) | $139,500 |
| – Common / nontraceable costs: | |||
| Allocated Non Traceable selling expenses | $56,000 | ||
| Allocation corporate expenses | $240,000 | ||
| Non traceable allocated production costs | $90,000 | ||
| = Total operating income | ($246,500) |
Performance Evaluation – Practice as You Learn – Practice Problem 2.
A company reported the following for a division for the current year:
| Sales | $1,700,000 |
| Operating expenses | $800,000 |
| Operating Assets on 1/1 | $1,800,000 |
| Cost of goods sold | $600,000 |
| Operating Assets on 12/31 | $2,200,000 |
| Required rate of return | 10% |
A. Calculate the return on investment showing profit margin and asset turnover
B. Calculate residual income
Answer
You need operating income and average operating assets to work the formulas. Calculate them first if they are not given.
Sales $1,700,000
- Cost of goods sold $600,000
= Gross profit $1,100,000
- Operating expenses $800,000
= Operating income $300,000
Beginning operating assets $1,800,000
+ Ending operating assets $2,200,000
Subtotal $4,000,000
/ 2 / 2
= Average operating assets $2,000,000
A. Return on Investment: Write the formula and drop in the numbers.
Operating Income Sales
Sales X Average Operating Assets
$300,000 X $1,700,000
$1,700,000 $2,000,000
17.65% X .85 = 15%
ROI =
Operating Income = $300,000
Average Operating Assets $2,000,000
B. Residual Income. Write the formula and drop in the numbers.
Average Operating Assets $2,000,000
X Required Rate of Return % 10%
= Required Operating Income $200,000
Actual Operating Income $300,000
- Required Operating Income (see below) $200,000
= Residual Income $100,000
The division earns $100,000 over and above the required 10% return on assets.