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