.
[pic]
Subject: Cost and Management Accounting
Prepare a segmented income statement using the contribution format, and explain the difference between traceable fixed costs and common fixed cost.
Segment reporting and Profitability Analysis
A different kind of income statement is required for evaluating the performance of a profit or investment center, something that emphasizes segments rather than the performance of the company as a whole. A segment is any part or activity of an organization about which a manager seeks cost, revenue, or profit data. A segment can be an individual store, a sales territory and a service center.
There are two keys to building segmented income statements: • A contribution format should
…show more content…
The general guideline is to treat as traceable costs only those costs that would disappear over time if the segment itself disappeared.
Traceable cost can become common cost:
Fixed cost that is traceable to one segment can become a common cost for another segment. For example, an air line might want a segmented income statement that shows the segment margin for a particular flight from Loss Angeles to Paris further broken down into first class, business class and economy class segment margins. The airline must pay a landing fee Charles DeGaulle air port in Paris. This fixed landing fee is a trace able fixed cost of the flight, but it is a common fixed cost of first class, business class and economy class segments. Even the first class cabinet is empty the entire landing fee must be paid. So the landing fee is not a traceable cost of the first class segment. But on the other hand paying the landing fee is necessary in order to have any first, business and economy class passengers. So the landing fee is common cost for these three classes of passengers and is a traceable cost for the flight as a whole.
Segment Margin:
The segment margin is obtained by deducting the traceable fixed costs of a segment from contribution margin. It represents the margin that is available after a segment has covered all of its own costs. The segment margin is the best gauge of the long-run profitability of a segment, since it includes only
An income statement, also known as a profit and loss statement shows how much money a company has spent over a period of time. It also shows the costs and expenses that are associated with earning that revenue. It is an important measure of the company’s profitability. The simple building blocks of a net income formula are revenues minus expenses equal net income.
Net Margin is the ratio of net profits to revenues of a company. It is used as an indicator of a company’s ability to control its costs and how much profit it makes for every dollar of revenue it generates. Net Margin is calculated using the formula: Net Margin = (Net Profit / Revenues ) * 100 Net margins vary from company to company with individual industries having typically expected ranges given similar constraints within the industry. For example, a retail company might be expected to have low net margins while a technology company could generate margins of 15-20% or more. Companies that increase their net margins over time generally see their share price rise over time as well as the company is increasing the rate at which it turns dollars earned into profits.
are costs that have already been incurred and cannot be changed by any decision made
From the analysis, relevant requirements to CCA are AASB 112 para. 79 and 80 (a), (b), (c) and (e), which require expense components to disclose separately. Also, para. 81(ab), (c(1)), (g) and 82A, regarding separate disclosure of tax consequences of other comprehensive income, numerical representation clarifying the relationship between tax expense and accounting profit, disclosure of amount of deferred tax assets and liabilities in balance sheet and income tax expense in income statement, and potential tax consequences have been followed respectively.
The income statement (IS) also known as the profit & loss statement provides the net gain or net loss of a business entity. The importance of the income statement is to evaluate profitability of a company (Finkler, Jones, and Koyner, 2013). The best use of the IS,
Topic Allowed income and deductions Deductions for and from AGI Deductions for and from AGI Deductions for and from AGI Deductions for and from AGI Deductions for and from AGI Deductions for and from AGI; deductions disallowance Ordinary and necessary requirement Reasonable compensation Business versus nonbusiness losses Reporting procedures Method of accounting: cash basis Prepayment provision for cash basis taxpayer All events and economic performance
Contribution income statement is an income statement that classifies cost by behavior (fixed cost and variable cost). Traditional income statement is sometimes called the functional income statement. It is an income statement prepared in the multiple-step or single –step income statement format which conforms to Generally Accepted Accounting Principles (GAAP) and can be used for external financial reporting. The main difference between the two is that the contribution income statement list variable costs first, followed by fixed costs. Keeping in mind that GAAP and does not permit businesses to use
The income statement generally covers standard categories of revenues and expenses, as well as industry specific categories or sub-categories that hold little utility outside the specific business area. Commonly listed major expenses cover a variety of costs common to nearly all businesses functioning in a country with an established government and rule of law. Costs of goods sold account for the cost of manufacturing or acquiring goods to sell. Selling, general, and administrative expenses cover everything from management costs to staffing compensation to the infrastructure required to move goods to a point where consumers may purchase them. This category also includes expenses such as employee training. Interest expense accounts for any interest payments the business must make to satisfy outside financing arrangements, such as servicing previously issued bonds. Tax burdens make up the last commonly found major expense on the income statement, including national, state, and local taxes.
1) What 3 items of important information does the income statement reveal about the financial performance of the company over the last three years?
The contribution margin is the difference between per unit revenue and per unit variable cost (the variable cost rate). It is the dollar amount per visit available to cover fixed costs. If the fixed costs are high (provider B), then the impact of the contribution margin on the profit is low.
Some management prefers to view the break even points via a percentage, in which case we would need to derive the contribution margin as a ratio. This would be the unit contribution margin/ unit sales price.
10. A segment of a business enterprise is to be reported separately when the revenues of the segment exceed 10 percent of the
In terms of eliminating the two segments, the definition for segment reporting is accounting for a business’s individual divisions or separate lines of business. The purpose of segment reporting is to provide a transparent image of a business’s performance on each line of business for the benefit of shareholders: SFAS 131. This allows shareholders to make informed decisions and develop a substantiated risk assessment. SFAS 131. Given that the newly acquired business is separate from our existing business, we must consider our options to determine if we meet the requirements for eliminating the two segments in terms of financial reporting. Current Generally
“The operating margin is a margin ratio used to measure a company’s pricing strategy and operating efficiency” (Cleverly and Song, 2011). In order to find the margin, the student had to divide the operating income ($197,605) by the net income ($258,125) and got the operating margin of 76.55% for this year. For the following year, the student also divided the operating income ($204,303) by the net income ($263,469) and got the operating margin of 77.54% for the previous year.
Correct Answer: The standard statements focus on accounting income for the entire corporation, not cash flows, and the two can be quite different during any given accounting period. However, for valuation purposes we need to discount cash flows, not accounting income. Moreover, since many firms have a number of separate divisions, and since division managers should be compensated on their divisions' performance, not that of the entire firm, information that focuses on the divisions is needed. These factors have led to the development of information that is focused on cash flows and the operations of individual units.