Segmented income statement in contribution format

This income statement format is a superior form of presentation, because the contribution margin clearly shows the amount available to cover fixed costs and generate a profit or loss.

contribution format income statement segmented by product lines

Indirect Expenses not allocated to Segments Segment A. An indirect cost is not traceable to a particular cost object; therefore, it only becomes an expense of the cost object through an allocation process. The depreciation expense is a direct cost for the company headquarters, but it is an indirect cost to each segment.

what is the key concept in segmented income statement

A contribution margin income statement varies from a normal income statement in the following three ways: Fixed production costs are aggregated lower in the income statement, after the contribution margin; Variable selling and administrative expenses are grouped with variable production costs, so that they are part of the calculation of the contribution margin; and The gross margin is replaced in the statement by the contribution margin.

Next, we describe each concept.

Segmented income statements quizlet

Be careful, however, not to equate direct costs with controllable costs. If a segment of the company is eliminated, the indirect cost for depreciation assigned to that segment does not disappear; the cost is simply allocated among the remaining segments. An indirect cost is not traceable to a particular cost object; therefore, it only becomes an expense of the cost object through an allocation process. Next, we describe each concept. For instance, if the plastics segment of a business closes down, the salary of the manager of that segment probably is eliminated. Because a direct cost is traceable to a cost object, the cost is likely to be eliminated if the cost object is eliminated. Sometimes a direct cost would remain even if the cost object were eliminated, but this is the exception rather than the rule. Indirect Expenses not allocated to Segments Segment A. In other words, a cost is not direct or indirect in and of itself. Fixed costs will increase if there is a step cost situation, where a block of expenses must be incurred to meet the requirements of an increase in activity levels. A cost object is a segment, product, or other item for which costs may be accumulated. A direct cost expense is specifically traceable to a given cost object.

Be careful, however, not to equate direct costs with controllable costs. In contrast, indirect costs become segment costs only through allocation; therefore, most indirect costs are noncontrollable by the segment manager.

Fixed costs will increase if there is a step cost situation, where a block of expenses must be incurred to meet the requirements of an increase in activity levels. For example, the salary of a segment manager may be direct to that segment and yet is noncontrollable by that manager because managers cannot specify their own salaries.

As sales increase, the contribution margin will increase in conjunction with sales, while fixed costs remain approximately the same.

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Segmented Income Statements