Segment Reporting
Statements of income designed to focus on various segments of the company is known as
segment reporting. A segment is any part or activity of an organization about which manager
seeks cost, revenue or profit data. The purpose of segment reporting is to provide information
needed by the manager to determine profitability of product lines, divisions, sales territories
and other segments of the company.
Pro forma Income statement:
X Company
Income statements by Segments
Sales
Variable costs:
Manufacturing
Selling and Administrative
Total
Contribution margin
Less : Fixed costs Controllable by
Division managers
Contribution Controllable by
Division Managers
Less:Fixed costs Controllable by
Others
Segment Margin
Less: Unallocated Common Costs
Manufacturing
Selling and Administrative
Net income
Total
xxx
Division
Pharma
xxx
Agri
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
Segmented Income statements can be prepared for activities at many levels in a company. To
provide more information to the company’s divisional manager, the report could further
segment the divisions according to their major product lines, and the product lines could be
segmented as to how they are sold- in retail or wholesale. A manager is able to gain
considerable knowledge into the company’s operations viewed from many different angles by
examining trends and results in each segment.
In segment reporting, there are two kinds of fixed costs- traceable and common. Only the
traceable or direct fixed costs are charged to the segments in the report. Traceable fixed costs
of the segment is a fixed cost that is incurred as a consequence of the existence of the segment
and could be easily identified or traced to the particular segment. Deducting traceable fixed
costs from the segment contribution margin would yield the segment margin .
Segment margin represents the margin available after a segment has covered all of its own
costs and the best gauge of the long run profitability of the segment. Deducting the allocated
common fixed expense not traceable to the individual segment from the segment margin
would result to the net operating income or loss of the segment.
I. Purple Associates is a consulting firm that specializes in information system for construction
and landscaping companies. The firm has two offices- one in Manila and one in Cebu. The firm
classifies the direct costs of consulting jobs as variable costs. A segmented income statement
for the company’s most recent year is given as follows :
Segment
Total
Manila
Cebu
Sales
750,000 100%
150,000
100%
600,000 100%
Less: Variable expenses
405,000
54
45,000
30
360,000 60
Contribution Margin
345,000
46
105,000
70
240,000
40
Less: Traceable Fixed expenses 168,000 22.4
78,000
52
90,000 15
Segment Margin
177,000 23.6
27,000
18
150,000 25%
Common fixed expenses
120,000 16.0
Net Operating income
57,000
7.6%
Required :
1. By how much should the company’s net operating income increase if Cebu increased its
sales by P75,000 per year ? Assume no change in cost behavior pattern.
Solution :
P75,000 × 40% CM ratio = P30,000 increased contribution margin in Cebu. Since the fixed
costs in the office and in the company as a whole will not change, the entire P30,000 would
result in increased net operating income for the company.
2. Refer to the original data. Assume that sales in Manila increase by P50,000 next year and
that sales in Cebu remain unchanged. Assume no change in fixed costs.
a. prepare a new segmented income statement for the company.
Requirement 2
a. The segmented income statement follows:
Sales.............................................
Less variable expenses.................
Contribution margin ....................
Less traceable fixed expenses ......
Office segment margin ................
Less common fixed expenses not
traceable to segments ...............
Net operating income ...................
Total Company
Amount
%
P800,000
100.0%
420,000
52.5
380,000
47.5
168,000
212,000
120,000
P 92,000
21.0
26.5
Segments
Manila
Cebu
Amount
%
Amount
P200,000
100%
P600,000
60,000
30
360,000
140,000
70
240,000
78,000
P 62,000
39
31%
90,000
P150,000
%
100%
60
40
15
25%
15.0
11.5%
II. ABC Company has two divisions, C and D. The overall company contribution margin ratio
is 30%, with sales in the two divisions totaling P500,000. If variable expenses are P300,000
in Division C, and if Division C’s contribution margin ratio is 25%, how much is the sales in
Division D ?
Solution : Total Sales
500,000
Less : Sales, Division C (300,000/.75)
400,000
Sales, Division D
100,000
2. Wash Company has three stores: X, Y and Z. During October, the variable expenses in Store X
were P 90,000 and the contribution margin ratio was 25%. Store Y had a contribution margin of
P27,000 and a contribution margin ratio of 20%. Store Z had variable expenses of P120,000
and a variable expense ratio of 60% of sales. For October, how much is the total sales ?
Solution :
X
90,000/.75
120,000
Y
27,000/.2
135,000
Z
120,000/.6
200,000
Total sales
455,000
3. Chase Company has two divisions, S and T. The company’s overall contribution margin ratio is
30% when sales in the two divisions total P750,000. If variable expenses are P405,000 in
Division S, and if Division S’s contribution margin ratio is 25%, how much is the sales in
Division T?
Solution :
Total sales
750,000
Less : sales in Division S (405,000/.75)
540,000
Sales, Division T
210,000
4. -5. JTC Company has two sales areas : North and South, During last year, the contribution
margin in the North Area was P50, 000, or 20% of sales. The segment margin in the South
Area was P15,000 or 8% of sales. Traceable fixed costs are P15,000 in the North and P10,000
in the South. Last year, the company reported total net income of P26,000.
4. What is the total fixed costs ( traceable and common) for JTC Company for the year ?
5. How much is the variable costs in the South Area ?
North
South
Sales
250,000
187,500
Variable costs
200,000
162,500
CM
50,000
25,000
Traceable fixed costs
15,000
10,000
Segment margin
35,000
15,000
Less: Common costs
Net income
a. total fixed costs ( traceable and common) 25,000 + 24,000 = 49,000
b. Variable costs for the South Area 187,500 -25,000CM =162,500
Total
437,500
362,500
75,000
25,000
50,000
24,000
26,000
6. – 9.
Japan Company has two stores ; D and S. During November, the company reported net income
of P30,000 and sales of P450,000. The contribution margin in Store D was P100,000, or 40% of
sales. The segment margin in Store S was P30,000 or 15% of sales. Traceable fixed expenses are
P60,000 in Store D, and P40,000 in Store S.
6. How much is the total sales of Store D?
250,000
7. How much is the variable expenses of Store S? 130,000
8. How much is the total fixed expenses ? 100,000 + 40,000 = 140,000
9. What is the segment margin ratio in Store D ? 40,000/250,000 = 16%
Sales
Variable costs
D
250,000
150,000
S
200,000
130,000
Total
450,000
280,000
Contribution margin
100,000
70,000
170,000
Traceable fixed costs
Segment margin
Common fixed costs
Net income
60,000
40,000
40,000
30,000
100,000
70,000
40,000
30,000
10. M Company has two divisions, 1 and 2. During July, the contribution margin in Division 1 was
P60,000. The contribution margin ratio in Division 2 was 40% and its sales were P250,000. Division 2’s
segment margin was P60,000. The common fixed expenses were P50,000 and the company’s net
income was P20,000. What is the segment margin for Division 1 ?
Solution :
Net income
20,000
Common Fixed Costs
50,000
Segment margin
70,000
Segment margin, Div 2
60,000
Segment margin, Div 1
10,000