Accounting 102 Chapter 6 & 5a Review

Dollar sales for a segment to break even =

segment traceable fixed expenses / segment CM ratio

Dollar sales for company to break even =

(traceable fixed expenses + common fixed expenses) / overall CM ratio

2. Solve for a (total fixed costs)

- Choose a point and plug it into the equation - y = total price - x = activity level - b = what was just solved for - find a

Common Mistakes

1. Omission of Costs 2. Failure to trace cost directly to specific segments 3. Inappropriate allocation base 4. Allocation of common fixed costs to segments

examples of common fixed costs

1. The salary of the CEO of GM is a common fixed cost of the various divisions of GM 2. The cost of heating a grocery store is a common fixed cost of the store's various departments- groceries, produce, bakery, meat etc. 3. The cost of the receptionist's salary at an office shared by a number of doctors is a common fixed cost of the doctors.-> traceable to office, but not individual doctors

examples of traceable fixed costs

1. The salary of the Fritos product manager at Pepsi is a traceable fixed cost of the Fritos business segment of Pepsi 2. The maintenance cost for the building in which Boeing 747's are assembled is a traceable fixed cost of the 74 business segment of Boeing 3. The liability insurance at Disnes World is a traceable fixed cost of the Disney World business segment of the Walt Disney Corp.

segment margin

A segment's contribution margin less its traceable fixed costs. It represents the margin available after a segment has covered all of its own traceable costs.

segment margin =

Contribution Margin - Traceable fixed expenses

Inappropriate allocation base

Costs should be allocated to segments only when the allocation base actually drives the cost being allocated.

High-Low Method

a method of separating a mixed cost into its fixed and variable elements by analyzing the change in cost between the high and low activity levels

1. Solve for b (variable cost per unit)

b (variable cost per unit) = (high cost - low cost) / (high activity - lower activity)

traceable fixed can become

common fixed costs

3. Use completed equation to solve for total mixed cost with changes in activity level

y = a + bX - X is what changes

y= a + bX

y = total mixed cost a = total fixed cost b = variable cost per unit X = activity level

omission of costs

costs assigned to a segment should include all costs attributable to that segment from the company's entire value chain

Failure to trace cost directly to specific segments

costs that can be traced directly to specific segments of a company should be driving costs

the segment margin is the best

gauge of the long-run profitability of a segment

The company break even in dollars is always

greater than the total of the segments break even in dollars because of common fixed expenses

How to do a segmented income statement

1. Calculate sales for the total company and each division 2. Solve for total variable expenses (total company and each division): - CGS and other variable expenses 3. Get contribution margin = Sales - Variable 4. Cacluate traceable fixed expenses 5. Solve for divisional segment margin = contribution margin - traceable fixed expenses 6. Calculate common fixed expenses 7. Solve for net operating income = divisional segment margin total - common fixed expenses

traceable fixed cost

A fixed cost that is incurred because of the existence of a particular business segment and that would be eliminated if the segment were eliminated

common fixed cost

A fixed cost that supports more than one business segment, but is not traceable in whole or in part to any one of the business segments.

Allocation of common fixed costs to segments

Common costs should not be arbitrarily allocated to segments based on the rationale that has to be cared for 2 reasons - makes profitable segments look unprofitable - makes managers uneasy

segment

any part or activity of an organization about which managers seek cost, revenue, or profit data

Segmented Income Statement

provides revenue and cost data for each segment of the company in a comparative fashion (side by side)