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Segment Reporting (Overview)

Segment Reporting (Overview). David B. Hamm, MBA, CPA Managerial Accounting OVC, Fall, 2002. Segment Reporting (1). Many firms today offer multiple products or are conglomerates of divisions or other entities selling differentiated products or services. Segment Reporting (2).

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Segment Reporting (Overview)

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  1. Segment Reporting (Overview) David B. Hamm, MBA, CPA Managerial Accounting OVC, Fall, 2002

  2. Segment Reporting (1) • Many firms today offer multiple products or are conglomerates of divisions or other entities selling differentiated products or services.

  3. Segment Reporting (2) • Sometimes this is done to capitalize on seasonal activities and seasonal cash flows (offsetting ‘downtime’ of one product with another product’s ‘uptime’)

  4. 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

  5. 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

  6. Segment Reporting (5) • Costs that are truly “common costs”—not attributable to one segment—should 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.

  7. Example (1) In the above statement, all fixed costs were allocated jointly at 50% to each segment, creating a loss for Segment A

  8. 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.

  9. Class Exercise Pause here for class exercise illustrating segment reporting

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