Chapter 6: Segement Margin Flashcards
Segment
= a part or activity of an organization about which managers would like cost, revenue or profit data. Examples include: product lines, sales territories, individual stores, divisions, customers, etc.
Traceable Fixed Costs
fixed costs that will not happen if the segment disappears [ also referred to as avoidable] Also called Direct Fixed Costs.
Common Fixed Costs
fixed costs that are going to happen regardless of whether or not the segment exists - these costs would need to be allocated. They are unavoidable since not directly traceable to a particular segment. In the past, they were arbitrarily assigned, we now will no longer allocate. Any allocation of CFC will diminish the value of the segment margin.
New Segment Margin Income Statement
…….check handout
Net income
will not change under contribution income statements and segment margin (SM) income statements.
Total Fixed Costs remain the same but…..
can be separated differently between traceable fixed costs (direct) and CFC (common) depending on how segment defined.
Variable costs and contribution margin
per unit and ratio stays the same; as activity increases total costs increase
Fixed costs
per unit and ratios change inversely as activity changes total costs remain the same.
The segment margin and net income are different when
total changes the per unit and ratio change. (They are based on mixed costs.)
Another Name for Traceable Fixed Costs
] Also called Direct Fixed Costs.
Best Indicator of Short Run Decisions
Contribution Margin
Best Indicator of Long Run Success
Segment margin
What changes as sales change on the income statement?
- traceable fixed costs
- segment margin
- net income
Discuss the Problem with Segment Margin
- use inappropriate allocation bases
- only allocate costs if there is a direct correlation between the allocation base and real cost driver
