AC505 Unit 8 Keep or Drop Seminar Reflection Example

The Bar Line Looked Like an Easy Cut: A Unit 8 Seminar Reflection on Segment Losses

[Student Name]

Purdue University Global

AC505: Advanced Managerial/Cost Accounting

Unit 8 Seminar Reflection

[Instructor Name]

[Date]

Harrow Creek Nut Company, the classmates and every figure are composite; the textbooks cited are real.

The Report as Distributed

The bar line's segment report showed revenue of $2,300,000, variable costs of $1,610,000, traceable fixed costs of $520,000 and $310,000 of allocated company costs, for a loss of $140,000. My post in the pre-seminar chat was four words: "Drop it. It loses."

Rebuilding the Figures

The instructor rebuilt the report line by line, asking for each cost whether it would disappear if the line did.

Revenue of $2,300,000 would disappear. So would the $1,610,000 of variable costs. The line's contribution margin, $690,000, is what the company gives up.

Of the $520,000 traceable fixed costs, $380,000 would go: the bar line's supervisor and crew, its packaging contract and its share of trade promotion. The other $140,000 is depreciation on the bar-forming equipment, which the company owns and could not sell for more than scrap; that cost stays whether the line runs or not.

The $310,000 of allocated company costs, a share of headquarters, information systems and the plant manager's salary, would all remain. They would simply be reallocated to the nut butter lines.

Dropping the line therefore saves $380,000 of costs and loses $690,000 of contribution. The company would be $310,000 worse off.

I had read the segment loss as the amount the company would save by closing the line, when it was really the result of charging the line with costs that would stay behind, and the decision turns on what goes away, not on what the report shows.

The Planogram Question

The rebuild took the instructor less than ten minutes, and nothing in it was advanced. That was the uncomfortable part.

Then Mateo asked a question I had not considered: how do grocery chains decide how much shelf space to give our nut butters? Two of our largest customers plan their shelves by brand block, and our bars sit beside our jars in the natural foods section. Dropping the bars could shrink the block, and a buyer might cut a nut butter facing along with them. Nobody could put a number on that, but the instructor said it was the kind of cost that never appears on a segment report and often decides the question.

Where I Went Wrong

I trusted the bottom line of a report built for a different purpose. Segment reports that allocate common costs are useful for seeing whether the company as a whole covers its overhead, but they mislead when used to decide whether to keep a segment (Datar & Rajan, 2021). I also ignored that some traceable costs are sunk, like the forming equipment, a distinction introductory texts draw between avoidable and unavoidable fixed costs (Horngren et al., 2014).

What I Would Recommend Now

Keep the bar line. Ask the bar line's manager to improve its segment margin, now $170,000 before allocations, perhaps by raising prices on the two weakest flavors. Present segment reports with contribution margin and segment margin shown before allocated costs, so the next reader does not make my mistake (Hilton & Platt, 2020).

How the Room Changed

About half the class had voted to drop the line in the opening poll. After the rebuild, most changed their vote, and after Mateo's question only two of us still favored dropping it, both arguing that the bar line distracts management from the nut butters. That is a fair point about focus, but it is a strategic argument, not a financial one, and it should be made as such rather than hidden behind a segment loss that does not mean what it seems to mean.

I also noticed that I had not asked a single question about the figures before voting. I saw a negative number at the bottom of a report and stopped reading. In my job I review segment reports every month, and I now realize I have probably done the same thing there. The first thing I did after the seminar was look at our own report format, which allocates headquarters costs in the same way, and suggest adding a segment margin line above the allocations.

My manager agreed to try it for one quarter, starting with the two product lines that currently show losses after allocations, which felt like a small, real result of a class discussion.

What I Take From the Session

I now ask two questions of any loss: which costs would actually disappear, and what else depends on this product. The second question came from a classmate, and it was the better one.

References

Datar, S. M., & Rajan, M. V. (2021). Horngren's cost accounting: A managerial emphasis (17th ed.). Pearson.

Hilton, R. W., & Platt, D. E. (2020). Managerial accounting: Creating value in a dynamic business environment (12th ed.). McGraw Hill.

Horngren, C. T., Sundem, G. L., Schatzberg, J. O., & Burgstahler, D. (2014). Introduction to management accounting (16th ed.). Pearson.