Contribution Income Statement Format

To mitigate for the aforementioned allocation problems, managerial accountants sometimes prepare a contribution income statement for each segment. This internal use document is consistent with responsibility accounting. Rather than focusing on segment profit/loss after taking into account all business costs, it instead identifies each segment's controllable elements. The exact format of the statement can vary considerably, but it generally facilitates identification of each unit's contribution margin, controllable fixed costs, and uncontrollable fixed costs. The net of these cost elements comprise the segment margin. Costs that cannot be traced directly to a subunit are considered only at higher levels.

Zen Computers is a diversified company with two primary divisions - Computer Hardware and Systems Support. The Hardware unit focuses on personal computers (PCs) and personal digital entertainment devices (PDE). Below are partial contribution income statements for Zen. Review these statements carefully, taking into consideration the various notes appended to the illustration:

Contribution Income Statement Format

In examining the divisional report for the hardware business (shaded in yellow), notice that separate segment margins were computed for each product unit (PCs and PDEs). The segment margin helps identify if each product is supporting its imbedded cost structure. Within each product segment, a distinction is drawn between the segment margin and the controllable contribution margin. This distinction is important in differentiating between management performance vs. business viability. In other words, management is charged with controlling certain costs, and management performance can be judged based on the controllable margin. However, a business unit may necessarily incur additional fixed costs that are beyond the control of management; these uncontrollable fixed costs must be considered in evaluating the viability of a business unit, independent of the assessment of management performance.

Note that certain costs incurred by the hardware division could not be assigned to a specific product segment (these costs are noted in the separate column for non traceable costs). These costs are included in the totals of the hardware division, but are not useful in evaluating the performance of the individual products.

The hardware division is carried forward into the corporate summary report (shaded in green), and totaled together with results of the systems division. Certain general corporate expenses were not traceable to individual divisions/products, and are only taken into consideration in the overall corporate income calculations. This type of contribution income statement reporting helps remove the bias that can result from arbitrary allocation of common costs and is sometimes helpful in identifying which business segments are targets for expansion, restructure, or discontinuance.

External Reporting of Segment Data

For corporate management to correctly discharge their duties, it is quite apparent why overall financial data must be disaggregated into segmented information. However, this same management group may be reluctant to share such information for external reporting. The reasons can vary, but one important point is that some units may be performing very well, and management does not wish to attract the attention of potential competitors. Conversely, some units may be a drag and management would rather not call attention to business mistakes.

Nevertheless, rules developed by the Financial Accounting Standards Board do require public companies to present a limited amount of financial information for each business segment. Potential investors usually find these added disclosures to be quite revealing. Generally, a company must provide descriptive information about its reportable operating segments, and note the revenues, operating profits, and identifiable assets of each significant segment. The standard also requires that segment data be reconciled to corporate totals, specifically noting the general corporate costs that were not traceable to individual segments.

At the top of the following page is a reduced/edited/highlighted illustration (actual rules require other disclosures about capital expenditures, etc., by segment; those amounts are redacted from this illustration) of segment data prepared by a public company, as taken from filings with the Securities and Exchange Commission:.

The FASB rules require that companies identify their externally reported segments using the same logic that is used to identify and manage segments on an internal basis. Although it is not illustrated here, you might also find it interesting to know that these same rules require companies to externally report information about geographic areas of operation (in a global context, such as Asia, Europe, the Americas, etc.) and the existence of major customers who comprise over 10% of a company's revenue stream.

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