Segment Performance Measurements

Segment Performance Measurements



Segment Performance Measurements

Chapter 10 Segment Performance Measurements


1.      Understand what a segment report is and its purpose.
2.      Identify traceable fixed costs, segment margin and common fixed costs.
3.      Know how to prepare a segment report showing performance or different segments.
4.      Allocate common fixed costs that affect the performance of different segments.



1.      Allocation of Costs and Segment Report
(Jun 11, Dec 14)




(a)       A segment can be an activity or a part of a company that involves revenue, costs and profit. For example, divisions of a company, individual stores, different geographical sales locations, different product lines, production plant, marketing departments and individual customers can give different segment.
(b)       Segment report shows the segment results of analyzing the profitability of each segment and in measuring the performance of those segment managers. Managers can focus more on improving the weaker segment or consider dropping that while maintaining the strengths of the stronger segment. Therefore, the segment results are relevant for responsibility accounting as it is related to the performance of individual segments.
(c)       A traceable fixed cost of a segment is defined as a fixed cost incurred because of the existence of the segment but not incurred without the segment.
(d)       Segment margin is calculated by deducting the traceable fixed costs of a segment from the segment’s contribution margin. It represents the margin available after a segment has covered all of its own costs.
(e)       Common fixed costs, as different from the traceable fixed costs, are costs that support the operations of more than one segment but are not traceable in whole or in part to any one segment. For examples, the salaries of the top executives of the company, general electricity fees for daily operation and building insurance costs for the company’s main premises.








Example 1


To illustrate how it works, here is an example:



Division A

Division B









Less: Variable expenses




Variable cost of goods sold




Other variable expenses




Total variable expenses




Contribution margin




Less: Traceable fixed costs




Divisional segment margin




Less: Common fixed expenses not traceable to individual divisions





Net operating income





1.3       In order to utilize segment reporting for achieving its purposes, costs must be properly allocated to segments properly. If the purpose is to determine the profits being generated by a particular division, all costs should be attributable to that division.
1.4       However, in daily operation, companies make mistakes easily when allocating costs to responsibility centres. Such problems generally include:
(a)        Omit some costs through the value chain
(b)       Allocate traceable fixed costs inappropriately as a result of failure to trace costs directly and with inappropriate allocation base
(c)        Allocate common fixed costs arbitrarily (任意地) among segments.
1.5       All of the above problems may seriously affect the segments’ profitability and so may even result in dropping of some segments. The net effect would be reducing the overall profit of the company and make it even more difficult to cover those common costs.

2.      General Aspects in Performance Measurements

2.1       In considering the segmental reporting, there are a large number of business performance measures which may be used.


Financial and non-financial measures


(a)       Financial performance measures include turnover, profit and return on capital employed.
(b)       Non-financial performance measures include market share, capacity utilization, labour turnover, etc.

2.3       The areas of performance criteria will vary. Some of the criteria, and control and measurement used, are as follows:

Financial performance

  • Cost
  • Profitability
  • Liquidity
  • Budget variance analysis
  • Capital structure
  • Market ratios
  • Level of bad debts
  • Return on capital employed


  • Sales growth by product or service
  • Measures of customer base
  • Relative market share and position


  • Sales units
  • Labour / machine hours
  • No. of passengers carried
  • No. of material requisitions serviced


  • Efficiency measurements of resources planned against consumed
  • Measurements of resources available against those used
  • Productivity measurements such as production per person or per hour or per shift


Quality of service

  • Quality measures in every unit
  • Number of customer complaints received
  • Number of new accounts lost or gained

Customer satisfaction

  • Speed of response to customer needs
  • Informal listening by calling a certain number of customers each week
  • Number of customers visit to the factory or workplace

Quality of working life

  • Days absence
  • Labour turnover
  • Overtime
  • Measures of job satisfaction


  • Proportion of new products and services to old ones
  • New product or service sales levels


Examination Style Questions

Question 1

(HKIAAT PBE Paper II Management Accounting June 2006 Q6)

Question 2 – Segment reporting, responsibility accounting and decentalised structure
Agape Company manufactures and sells two types of mobile phone: 3G and 4G. The manufacturing information for the first quarter is as follows:




Sales in units



Sales price per unit



Variable production costs per unit



Traceable fixed production costs



Variable selling expenses per unit



Traceable fixed selling expenses



Allocated portion of corporate expenses




(a)     Prepare a segmented income statement for the first quarter, showing columns for the company as a whole and for each product.                                                                             (8 marks)
(b)    Explain why segment reporting is an extension of responsibility accounting. Use the data from part (a), point out the item(s) which is/are relevant for responsibility accounting. (3 marks)
(c)     The director of the 3G product is responsible for its production and marketing. What are the advantages of such decentalised structure?                                                    (4 marks)
(d)  What are the THREE levels of responsibility to which decentalised companies divide their segments? Describe briefly and indicate which level the 3G business belongs to.         (5 marks)
                  (HKIAAT PBE Paper II Management Accounting and Finance June 2011 Q4)



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Segment Performance Measurements


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Segment Performance Measurements



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Segment Performance Measurements