Chapter Summary

Segment reports can provide information for evaluating the profitability and performance of divisions, product lines, sales territories, and other segments of a company. Under the contribution approach to segment reporting, only those costs that are traceable are assigned to a segment. Fixed common costs and other nontraceable costs are not allocated to a segment. A cost is considered to be traceable to a segment only if the cost is caused by the segment and eliminating the segment would result in avoiding the cost.

Analysis provided by accountants can help managers view the important segment of marketing in a new light. Revenue and sales quantity analysis provide information about the effects of market changes or sales mix changes on profits. Association of marketing expenses with drivers that cause these expenses permits a review of how marketing activities cause expenses. Activity analysis is a powerful tool for assisting managers to understand marketing activities and their costs.

Costs that are traceable to a segment are further classified as either variable or fixed. The contribution margin is sales less variable costs. The segment margin is the contribution margin less the traceable fixed costs of the segment.

For purposes of evaluating the performance of managers, there are at least three kinds of business segments-cost centers, profit centers, and investment centers. Return on investment (ROI) is widely used to evaluate investment center performance. However, there is a trend toward using residual income or economic value added instead of ROI. The residual income and economic value added approaches encourage profitable investments in many situations where the ROI approach would discourage investment.