12-‹#›
Chapter
12
Segment Reporting
12-2
LEARNING OBJECTIVES
1. Prepare a segmented income statement
using the contribution format, and explain the
difference between traceable fixed costs and
common fixed costs. (us)
3. Identify three business practices that hinder
proper cost assignment. (you)
3. Transfer pricing (Appendix 12 A) (us)
12-3
Traceable and Common Fixed Costs
Fixed
Costs
Traceable
Costs arise because
of the existence of
a particular
segment.
Common
Costs arise because
of overall operating
activities.
12-‹#›
12-4
Hindrances to Proper Cost Assignment
Three Problems
Omission of some
costs in the
assignment process.
Assignment to segments
of costs that are
really common costs of
the entire organization.
Use of inappropriate
methods for allocating
costs among segments.
12-5
12-15
Appendix
12A
Transfer Pricing
12-‹#›
12-7
Transfer Pricing
 Objectives:
 Setting transfer prices to motivate the managers to
act in the best interest of the overall company: goal
congruence
 Preserve decision making autonomy: fundamental
to decentralization
 Fair treatment to both selling and buying managers
 More of an issue when there is an external
market for the selling division product
12-8
Three Common Approaches:
Set transfer price using either:
1. Variable Cost + mark-up
2. Full Cost + mark-up
Managers negotiate
their own transfer price
Set transfer price at
market price
12-9
Negotiated Transfer Prices
 Advantages:
•
Disadvantages
12-‹#›
12-10
Market Price
 Advantages:
•
Disadvantages
12-11
Cost-Based Transfer Pricing Rule
 Need a rule that will lead to the correct
decision regarding internal transfers & the
price
12-12
12-21
12-‹#›
12-13
12-28