Question

What is the key issue regarding traceable and common costs as they relate to segmented statements?

Answer 1

Solution

Key issue regarding traceable and common costs as they relate to segmented statements:

Traceable costs:

Traceable costs comprise all fixed costs that can be directly related to an activity or product or service. Despite being fixed in nature, these costs can be avoided if the particular activity or product or service is discontinued.

These costs are deducted from contribution margin to arrive at segment margin in a segmented income statement.

Traceable costs are relevant in decision making relating to continuance or discontinuance of a specific product or activity or service.

Examples of traceable costs include advertising costs.

On the other hand, common costs are such costs which are incurred at company level and are not identifiable with any specific activity or product or service.

Fixed costs that support the operations of more than one activity, or product or segment. Such costs, which are not traceable to any specific segment are common costs.

These costs are allocated to activities or product or service based on a common allocation base. These costs are not relevant for decisions involving continuance or discontinuance of any specific activity, product or service.

Example of common costs include manager’s salary.