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OPERATING SEGMENTS AND BACKFLUSH COSTING

Submitted by: SHIVIYA MBA-HR

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Operating Segment
Definition: Under international financial reporting standards, an operating segment is a component of an entity that is a profit centre that has discrete financial information available, and whose results are reviewed regularly by the entity's chief operating decision maker for purposes of performance assessment and resource allocation. An entity's corporate headquarters is not considered an operating segment, nor are an entity's postemployment benefit plans. The Wienerberger Group manages its business based on geographic criteria and, in accordance with the internal reporting structure, has designated the following regions as strategic operating segments: North-West Europe, Central-West Europe, CentralEast Europe and North America as well as the

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Investment and Other segment. This last segment includes the Group headquarters and investments plus business activities in India. The definition of business segments and the presentation of segment results are based on the management approach prescribed in IFRS 8, and follow internal reports to the Managing Board of
Wienerberger AG as the key operating decision maker who decides on the allocation of resources to the individual segments.

ANALYZING THE PERFORMANCE

OPERATING

SEGMENTS

An operating segment generally has a segment manager who is accountable to the chief operating decision maker for the results of the segment. Reports to the responsible key operating decision maker include operating EBITDA as the key indicator for the management of the business segments as well as operating EBIT, financial results and profit after tax. Accordingly, these indicators are also presented in the segment report.

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The key operating decision maker receives reports on the operating segments EBITDA , operating EBIT , financial results and profit after tax to analyze their performance .

ALLOCATION OF RESOURCES The allocation of revenues, operating EBITDA, operating EBIT, financial results, income taxes, profit after tax, assets, liabilities, capital employed and capital expenditure is based on the headquarters of the individual companies. IS SEGMENT REPORTING NECESSITY? Segment reporting is not conditional on the legal form of the securities and, in accordance with IFRS 8.2-3, applies to both debt and equity instruments.

PROVISIONS IN IFRS IFRS 8 requires the disclosure of information on operating segments that are defined on the basis of the internal reporting structure used by a company. Additional information is also required on the products, services and geographical regions (reporting segments).

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The segmentation of data in accordance with IFRS 8 is based on the management approach generally reflects the segmentation used for internal reporting and decisionmaking. In contrast to the form of segmentation required by IAS 14 , where areas of business are designated as primary segments and geographical regions as secondary segments . IFRS 8 also allows for product-oriented, geographical, customer-based or legally defined segments. Since IFRS 8 has been adopted into the European Union body of law, the classification of business activities by secondary segments now only takes place as part of internal reporting. In accordance with IFRS 8.5, a component of a company should be defined as an operating segment for external reporting purposes when: it engages in entrepreneurial activities that lead to revenues and expenses, including revenues and expenses arising from transactions with other components of the same company, the results of its operations are regularly reviewed by the companys decision-makers and used to assess performance and allocate resources, and the companys internal reporting systems can provide discrete financial information is available on the component.

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Two or more operating segments may be aggregated into a single operating segment if they have similar economic characteristics that lead to expectations of comparable long-term development and if they meet the aggregation criteria defined in IFRS 8.12,additional operating segments must be defined until at least 75% of the total segment revenue is generated by sales to external customers. There is no predefined order for this selection.

Industrial market segmentation

A Generic Principle
One of the recommended approaches in segmentation is for a company to decide whether it wants to have a limited number of products offered to many segments or many products offered to a limited number of segments. Some people recommend against businesses offering many product lines to many segments, as this can sometimes soften their focus and stretch their resources too thinly. See figure 1.

Figure 1

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The advantage in attempting the above approach is that although it may not work at all times, it is a force for as much focus as practicable. The one-to-many model ensures in theory that a business keeps its focus sharp and makes use of economies of scale at the supply end of the chain. It kills many birds with one stone. The many-to-one model also has its benefits and drawbacks. The problem is that a business would stretch its resources too thinly in order to serve just one or a few markets.

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Automotive industry in India

The AutomoGeographical

Segmentation: Category-wise registration in Union Territories of India

Anda Dad man ra Da & & Chand ma Laksha Pondic Nico Nag Delhi igarh n& dweep herry bar ar Diu Islan Hav ds eli

Type of Vehicle

Multiaxled/A rticulated 5,4 1,8 75,60 1,519 1,671 Vehicles/Tru 87 96 1 cks & Lorries Light Motor 7,459 1,1 1,8 75,94 270

6,588

2,923

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Type of Vehicle

Anda Dad man ra Da & & Chand ma Laksha Pondic Nico Nag Delhi igarh n& dweep herry bar ar Diu Islan Hav ds eli 90 29 7

Vehicles (goods)

Buses

459

1,239 154 361

36,05 9

1,831

Taxis

436

24,71 1,173 108 43 2

1,421

Light Motor Vehicles 784 (passenger)

500 890

20,89 408 3

4,283

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Type of Vehicle

Anda Dad man ra Da & & Chand ma Laksha Pondic Nico Nag Delhi igarh n& dweep herry bar ar Diu Islan Hav ds eli

Total 11,54 7,4 5,0 233,2 3,198 678 Commercial 2 39 19 12 Two Wheelers 21,74 416,9 17, 30, 2,665 3,978 3 17 881 351 ,750 157,6 9,2 12, 1,192 1,693 78 12 70 278 ,389 122,2 429 295 85 83

17,046

235,43 8

Cars

47,642

Jeeps

1,033 -

3,838

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Type of Vehicle

Anda Dad man ra Da & & Chand ma Laksha Pondic Nico Nag Delhi igarh n& dweep herry bar ar Diu Islan Hav ds eli 36 6 38 8,386 5 2,545 318 1,582 4,541 295,90 4

Omni Buses Tractors Trailors Others 261 67 461

44 165 4,851 44 46 124 99 -

30 9,705 503

Total non- 25,25 574,5 27, 43, 4,003 4,693 commercial 8 65 676 281 ,463

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BACKFLUSH COSTING
Back flush costing: An accounting system that applies cost to products only when the production is complete. Back flush costing is a nontraditional type of costing that complements just-in-time inventory systems. Back flush costing is a lesser-known type of costing system. This is a type of costing system that is based on the philosophy that inventory is a not a value-adding activity. Most often back flush costing systems are seen as an integrated part of just-in-time (JIT) inventory systems. Due to the pull system involved with JIT inventory systems, back flush costing tends to work better than other traditional types of inventory systems.

Definition Method of costing a product that works backwards: standard costs are allocated to finished products on the basis of the output of a repetitive manufacturing process. Used where inventory is kept at minimum (as in 'just in time' operations) this method obviates the need for detailed cost tracking required in absorption costing, and usually eliminates separate accounting for work-inprocess, called back flush accounting.

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What Is Back flush Costing? Back flush costing varies from traditional costing systems in that it does not track costs in order; instead it delays the recording of certain costs. The process used in backflush costing complements just-in-time (JIT) inventory systems by making the process of costing simpler. This type of costing system may be used to complement activity-based costing for the same reason. Due to this and other variations from traditional costing methods, back flush costing may not be consistent with generally accepted accounting principles (GAAP), due to the fact that in most stages it may undervalue the inventory.

Procedures in Back flush Costing The procedures in back flush costing may vary greatly from company to company, as there are various forms of this costing that can be used. Back flush costing may eliminate work-in-process accounts and instead flush all of the costs back at the end of the production run being costed . Back flush costing may also record raw materials at a standard cost when they are purchased, while recording conversion costs at their actual costs. Back flush costing is also used by eliminating the finished goods

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inventory account and instead recognize the finished goods at the point of sale

When Is Back flush Costing Appropriate? Back flush costing is most appropriate when used to complement a just-in-time inventory management system or to compliment an activity-based costing system. This is due to the fact that back flush costing simplifies the costing process in these situations. However, users of this type of system must keep in mind that it does not always conform to generally accepted accounting principles (GAAP) and that this type of system can be criticized because it does not leave a sequential audit trail. In spite of these concerns, back flush costing may still be the most appropriate system for certain just-in-time inventory management situations. This is especially true if it is used in conjunction with activity-based costing. Standard costs are flushed backward through the system to assign costs to products. The result is that detailed tracking of costs is eliminated. The system is best suited to companies that maintain low inventories because costs then flow directly to cost of goods sold. Work-in-process is usually eliminated, journal entries to inventory accounts may be delayed until the time of product completion or even the time of sale, and standard costs are used to assign costs to units when journal entries are made, that is, to

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flush costs backward to the points at which inventories remain.

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References:-

-Bonoma and Shapira(1984) Segmenting Industrial Market -Automobileindia.com -India second fastest growing auto market after China , the hindu businessline .com -s Kalyana Ramanatha India to top in car volumes by 2050. -IFRSclass.com -www.accounting tools.com/dictionaryoperatingsegment - www.accounting tools.com/definition/backflush costing -tiffany-bradford.suite101.com>business & finance