Segment margin is an amount of new profit (or net loss) generated by segment of the business. If the company business is differentiated, e.g. products are on different markets, different types of products are merchandised, it is convenient to compare different margin obtained by different segments of the company. For example, segment margin on product A in country Z can be larger than for the same product in country Y. In other example, on the same markets product B can have larger segment margin than product C. To calculate segment margin it is necessary to take away expenses from revenues, that are relatedo to the segment. In case of general costs, they should be divided between segments in order to get proper result(E. Chang,Y. Luo, J. Ren, 2014, p. 411-422).
To do the report of segments - business is divided into different parts, depending on geographic area, product lines and other important information, that can supply individual data about every of segment. The example can be the grocery chain. Every store will be the segment in that case. Moreover, if for different product lines(meats, fruits, milk) we use different decision-making and accounting systems – they are different segments also. Nonsegmented financial documents are the same as segmented financial statements. Everything that differs in that documents is: in the segmented financial statements is recorded how much of profit brings every of segment. The segment margin is a helpful evidence of a profit of every segment. In that case when the result is negative: the keeping of that segment should be stopped until it brings the worth to other segments. If in a segment’s margin are set traceable fixed costs, it means that these costs exist only because of the existing of that segment. For example, salaries for the manager of some segment would be such cost that is connected directly with a segment (Imea, 2014, p. 427).
Common cost – is a cost, that is divided on two or more entities or segments. In that situation when common costs are distributed to segments , the segment margin’s worth is decreasing. However, some business distribute common costs only in that case when the segment is finished. Common cost are usually hard to be kept under the control by the department manager, who is responsible for costs. It can cause problems in identification of the profitability of the segment, that we want to explore individually(Imea, 2014, p. 428).
Segment margin allows to measure enduring profitability and is useful in making such important for business decisions as whether to start some product lines or finish them.
Moreover, managers of investment centers are responsible for that part of money that are invested in generating profit. Only in that case they can be responsible for the expenses and revenue of the segment. These managers have the right for making such decisions as: changing the structure of the facilities, buying new equipment, increasing the facilities or for example, set new locations(P. Sivabalan, J. Wakefield, R. Sawyers, S. Jackson, G. Jenkins, 2018, p.215).
Segmented profit and loss statements
Segmented profit and loss statements are created for calculation of the profit for every main segment in the company. It is uncomplicated to get and keep records of trades for the segment. However, tracing cost to one definite segment or making the decision how to treat costs among the segments can be a very hard-making decision.
Changeable costs are usually traced directly to the segment. Variable cost differ in a proportion to the trade volume. Also, that costs might be distributed to a segment that is based on trade volume(P. Sivabalan, J. Wakefield, R. Sawyers, S. Jackson, G. Jenkins, 2018, p.216).
Analysis of the all segments of the organization is done when we have to make decision about:
- which costs to allocate
- which costs to assign
Segment costs must compromise all costs, that are connected with that segment – only these costs that appeared because of that definite segment. The problem that can come up is: many fixed costs are not direct.
To get the answer on the question whether to allocate the fixed costs to the segment we should decide whether these costs can be eliminated or reduced in the situation if the segment would be abolished(P. Sivabalan, J. Wakefield, R. Sawyers, S. Jackson, G. Jenkins, 2018, p.216).
Positive and negative segment margins
The result of segment margins can be:
- positive: the direct costs are smaller than the revenue of the segment. The segment is able to cover the costs, that were caused because of that segment, and moreover – to bring some part of revenue to overall operating income. So, the decision for that segment will be – continue the keeping of that segment.
- negative: the directs costs are bigger that the revenue of the segment. The management of the organization should eliminate the segment.
But the overall common costs will be incurred. No matters, which decision will be made by the management. These costs are called – unavoidable costs. Other costs, that left, should have enough of contribution margin for covering all costs - common and direct(B. E. Needles, M. Powers, S.V. Crosson, 2010, p. 1194).
Segment Profitability Analysis
Contains the development of the preparing of the segmented income statement. During that process variable costing are used for defining the fixed and variable costs(B. E. Needles, M. Powers, S.V. Crosson, 2010, p.1194).
Principles of Accounting, Belverd E. Needles, Marian Powers, Susan V. Crosson, Cengage Learning, London, 2010, p. 1194
The difference between segment margin and contribution margin
The contribution margin is that number that is left if we will minus irregular costs from sales revenue. The contribution margin is very helpful in planning process during the making decisions. For example, these one where fixed costs will not become different with time. But the segment margin is that number that is left from the contribution margin after withdrawing traceable fixed costs. The segment margin is helpful in calculation of what is the total profit of the individual segment(M. M. Mowen, D. R. Hansen, D. L. Heitger, 2013, p. 365).
- Aghdaie M. H., Alimardani M. (2015), Target market selection based on market segment evaluation: A multiple attribute decision making approach, "International Journal of Operational research", 24, 262-278.
- Camilleri, M. A. (2018), Market Segmentation, Targeting and Positioning. In Travel Marketing, Tourism Economics and the Airline Product, Springer, Cham, p. 69-83.
- Chang, E. C., Luo, Y., & Ren, J. (2014). Short-selling, margin-trading, and price efficiency: Evidence from the Chinese market, "Journal of Banking & Finance", 48, 411-424.
- Imea(2014), Wiley CMAexcel Learning System Exam Review 2015: Part 1, Financial Planning, "John Wiley & Sons", Hoboken, p. 427-428
- Mowen M., Hansen D. R., Dan L. Heitger,(2013), Cornerstones of Managerial Accounting, "Cengage Learning", London, p. 365.
- Sivabalan P., Wakefield J., Sawyers R. B., Jackson S, Jenkins G.(2018),ACCT3 Management, "Cengage AU", Melbourne, p. 215-216.
Author: Diana Fandul