Service Organization; Segment Reporting

Music Teachers, Inc., is an educational association for music teachers that has
20,000 members. The association operates from a central headquarters but has
local membership chapters throughout the United States. Monthly meetings are
held by the local chapters to discuss recent developments on topics of interest to
music teachers. The associations journal, Teachers Forum, is issued monthly
with features about recent developments in the field. The association publishes
books and reports and also sponsors professional courses that qualify for
continuing professional education credit. The associations statement of
revenues and expenses for the current year is presented below.

Revenues:

Music Teachers, Inc.

Statement of Revenues and Expenses
For the Year Ended November 30

3,275,0
00

Expenses:
Salaries
Personnel costs
Occupancy costs
Reimbursement of member costs to local
chapters
Other membership services
Printing and paper
Postage and shipping
Instructors fees
General and administrative
Total expenses
Excess of revenues over expenses

920,00
0
230,00
0
280,00
0
600,00
0
500,00
0
320,00
0
176,00
0
80,000
38,000

3,144,0
00
131,00
0

The board of directors of Music Teachers, Inc., has requested that a segmented
income statement be prepared showing the contribution of each profit center to
the association. The association has four profit centers: Membership Division,
Magazine Subscriptions Division, Books and Reports Division, and Continuing
Education Division. Mike Doyle has been assigned responsibility for preparing the
segmented income statement, and he has gathered the following data prior to its
preparation.
a. Membership dues are $100 per year, of which $20 is considered to cover a
one-year subscription to the associations journal. Other benefits include
membership in the association and chapter affiliation. The portion of the
dues covering the magazine subscription ($20) should be assigned to the
Magazine Subscription Division.

b. One-year subscriptions to Teachers. Forum were sold to nonmembers and

libraries at $30 per subscription. A total of 2,500 of these subscriptions were
sold last year. In addition to subscriptions, the magazine generated
$100,000 in advertising revenues. The costs per magazine subscription
were $7 for printing and paper and $4 for postage and shipping.
c. A total of 28,000 technical reports and professional texts were sold by the
Books and Reports Division at an average unit selling price of $25. Average
costs per publication were $4 for printing and paper and $2 for postage and
shipping.
d. The association offers a variety of continuing education courses to both
members and nonmembers. The one-day courses had a tuition cost of $75
each and were attended by 2,400 students. A total of 1,760 students took
two-day courses at a tuition cost of $125 for each student. Outside
instructors were paid to teach some courses.
e. Salary costs and space occupied by division follow:
Space
Salari
Occupied
es
(square feet)

210,0
2,00
Membership
$

00
0
Magazine

150,0
2,00
Subscriptions

00
0

300,0
3,00
Books and Reports

00
0
Continuing

180,0
2,00
Education

00
0

80,00
1,00
Corporate staff

0
0

920,0
10,0
Total
$

00
00
Personnel costs are 25% of salaries in the separate divisions as well as for
the corporate staff. The $280,000 in occupancy costs includes $50,000 in
rental cost for a warehouse used by the Books and Reports Division for
storage purposes.
f. Printing and paper costs other than for magazine subscriptions and for
books and reports relate to the Continuing Education Division.
g. General and administrative expenses include costs relating to overall
administration of the association as a whole. The companys corporate staff
does some mailing of materials for general administrative purposes.
The expenses that can be traced or assigned to the corporate staff, as well as
any other expenses that are not traceable to the profit centers, will be treated as
common costs. It is not necessary to distinguish between variable and fixed
costs.
Required:
1. Prepare a contribution format segmented income statement for Music
Teachers, Inc. This statement should show the segment margin for each
division as well as results for the association as a whole.
ANSWER:
See the segmented statement on the second following page. Supporting
computations for the statement are given below:

Sale
s:
Membership dues (20,000 x $100)

Assigned to Magazine Subscriptions Division

(20,000 x $20)

2,000,0
00
400,00
0
1,600,0
00

Assigned to Membership Division

Non-member magazine subscriptions (2,500 x

$30)

75,000

Reports and texts (28,000 x $25)

700,00
0

Continuing education courses:

One-day (2,400 x $75)

Two-day (1,760 x $125)

Total revenue

180,00
0
220,00
0
400,00
0

Salary and personnel

costs:

Membership Division
Magazine Subscriptions
Division
Books and Reports
Division
Continuing Education
Division
Total assigned to divisions
Corporate staff
Total

Salaries
$ 210,0
00
150,0
00
300,0
00
180,0
00
840,0
00
80,00
0
$ 920,0
00

Personnel Costs
(25% of Salaries)
$

52,50
0
37,50
0
75,00
0
45,00
0
210,0
00
20,00
0
230,0
00

Some may argue that, except for the $50,000 in rental cost directly attributed

to the Books and Reports Division, occupancy costs are common costs that
should not be allocated. The correct treatment of the occupancy costs
depends on whether they could be avoided in part by eliminating a division.
In the solution below, we have assumed they could be avoided.
Occupancy costs ($230,000 allocated + $50,000 direct to the Books and Reports
Division = $280,000):
Allocated to:
46,00
Membership Division ($230,000 x 0.2)
$
0
Magazine Subscriptions Division ($230,000
46,00
x 0.2)
0
Books and Reports Division ($230,000 x 0.3
119,0
+ $50,000)
00
Continuing Education Division ($230,000 x
46,00
0.2)
0
23,00
Corporate staff ($230,000 x 0.1)
0
280,0
Total occupancy costs
$
00
Printing and paper costs

Assigned to:
Magazine Subscriptions Division (22,500
x $7)

Books and Reports Division (28,000 x $4)

157,5
00
112,0
00

Remainder-Continuing Education Division

Postage and shipping costs

Assigned to:
Magazine Subscriptions Division (22,500
x $4)

Books and Reports Division (28,000 x $2)

90,00
0
56,00
0

Remainder-corporate staff

320,0
00

269,5
00
50,50
0
176,0
00

146,0
00
30,00
0

Division
Associatio
n
Total
Sales:
Membership
dues
Non-member
magazine

2,000,0
00
75,000

Membershi
p
$

1,600,0
00

Magazine
Subscripti
ons
$

400,0
00
75,00
0

Books &
Reports

Continuin
g
Educatio
n

subscriptions
Advertising
Reports and
texts
Continuing
education
courses
Total
revenues
Expenses
traceable to
segments:
Salaries
Personnel
costs
Occupancy
costs
Reimburseme
nt of member
costs to local
chapters
Other
membership
services
Printing and
paper
Postage and
shipping
Instructors
fees
Total
traceable
expenses
Division
segment margin
Common
expenses not
traceable to
divisions:
Salariescorporate
staff
Personnel
costs
Occupancy
costs
Postage and
shipping
General and
administrativ
e

100,00
0
700,00
0

100,0
00
$

400,00
0
3,275,0
00

700,0
00

1,600,0
00

575,0
00

700,0
00

400,0
00
400,0
00

840,00
0
210,00
0
257,00
0

210,00
0

150,0
00
37,50
0
46,00
0

300,0
00
75,00
0
119,0
00

180,0
00
45,00
0
46,00
0

600,00
0

600,00
0

500,00
0
320,00
0
146,00
0

500,00
0
157,5
00
90,00
0

112,0
00
56,00
0

50,50
0

52,500
46,000

80,00
0

80,000
2,953,0
00
322,00
0

80,000
20,000
23,000
30,000
38,000

1,408,5
00
191,50
0

481,0
00
94,00
0

662,0
00
38,00
0

401,5
00
(1,500
)

Total common
expenses
Excess of
revenues over
expenses

191,00
0
$

131,00
0

2. Give arguments for and against allocating all costs of the association to the
four divisions.
ANSWER:
While we do not favor the allocation of common costs to segments, the most
common reason given for this practice is that segment managers need to be
aware of the fact that common costs do exist and that they must be covered.
Arguments against allocation of all costs:
Allocation bases will need to be chosen arbitrarily because no cause-andeffect relationship exists between common costs and the segments to
which they are allocated.
Management may be misled into eliminating a profitable segment that
appears to be unprofitable because of allocated common costs.
Segment managers usually have little control over common costs. They
should not be held accountable for costs over which they have no control.

Allocations

of common costs undermine the credibility of performance

reports. Segment managers may resent such allocations and ignore the
entire performance report as arbitrary and unfair.