Common Mistakes in reation to segmented income statements

Companies often make mistakes when assigning cost to segments. they omit some costs, inappropriately assign traceable fixed costs, and arbitrarily allocate common fixed costs.

Companies do not correctly handle traceable fixed expenses on segmented income statements.
------1) They do not trace fixed expenses to segments even when it is feasible to do so.
------2) They use inappropriate allocation bases to allocate traceable fixed expenses to segments.

Failure to trace Cost Directly - Cost that can be traced directly to a specific segment should be charged directly to that segment and should not be allocated to other segments.

Inappropriate Allocation base - Some Companies us arbitrary allocation bases to allocate costs to segments. Example: Some companies allocate selling and administrative expenses on the of sales revenues. Thus, if a segment generates 20% of total company sales, it would be allocated 20% of the company's selling and administrative expenses as it " fair share".

Arbitrarily Dividing common costs among segments - The 3rd business practice that leads to distorted segment costs is the practice of assigning non-traceable costs to segments. example: Some companies allocate the common costs of the corporate headquarters building to products on segment reports