5 Segmented Income Reporting
Learning Objectives LO
LO1 Explain the purposes and advantages of segmented income reporting
LO2 Prepare a segmented income statement
LO3 Compute contribution margin and segment margin
LO4 Identify and account for segment traceable fixed costs and common fixed costs
LO5 Segments within segments
LO6 Segment cost volume profit analysis
LO7 Compute breakeven for the whole organization as well as individual segments within the organization
Purposes of segmented income reporting LO1
In addition to companywide income reporting, managers or owners also need to measure the profitability of individual segments within their organizations. Anorganizational segment is a part or activity within an organization about which managers would like cost, revenue, or profit data. Organizational segments can include divisions, individual stores, geographic regions, customers, or product lines. For example, Graeters Ice Cream will look at the profitability of the company as a whole as well as the profitability of each individual retail location. The individual stores are considered segments within the organization. Graeters might also look at the profitability of product lines across all locations. In this case, the data would be segmented by product lines, such as ice cream and bakery items. A large or complex organization may segment the overall financial data in multiple ways in order to analyze the various parts.
The contribution margin format is used to prepare segmented income statements. The contribution margin income statement classifies costs on the basis of cost behavior. Cost behavior is how a cost reacts to changes in production or sales quantity. Cost behavior is classified as variable, fixed or mixed.
The company Media Masters is used in the following sections to demonstrate the process of preparing segmented income statements. Media Masters is a rapidly growing social media game development company. The company’s programmers develop online games for social media applications and cell phones.
Video Illustration 5-1: Overview of organizational segments LO1
Media Masters recently launched a series of successful social media games causing a spike in customer subscriptions and sales revenue. To manage growth and make informed decisions, the company’s Chief Operating Officer requested the company’s contribution margin income statement as well as segmented income statements.
A contribution margin income statement for the total company and an example of the company’s segments are presented in Exhibit 5-1. Media Masters is currently reporting total net operating income of $25,000. The company has two major divisions–social media games and cell phone games. Each division can be further segmented into product lines. For example, the social media games division consists of two major project lines–role playing games and puzzle games.
Exhibit 5-1 Media Masters contribution margin income statement, organizational segments, and video explana