Companies Often Allocate Common Fixed Costs Among Segments

question 350

Essay

Companies often allocate common fixed costs among segments. For example, common fixed corporate costs are often allocated to divisions and appear as part of the divisional performance reports.
Required:
What dangers are there in allocating common fixed costs to segments when involved in a decision to possibly drop a segment such as a product or a division?

---

Definitions:

High Risk

Referring to investments or activities with a greater than usual potential for loss or that may involve significant uncertainty.

Equity Method

An accounting technique used to record investments in other companies where the investor has significant influence but not full control.

Investment Account

A financial account that holds securities, cash, and other investments for investors, typically managed by a financial institution or investment firm.

Dividend Income

Income received from owning shares in a company, typically paid out from the company's earnings to its shareholders at set intervals.