Question

In financial reporting for segments of a business, the operating profit or loss of a segment should include:

a. Direct costs only
b. Direct costs and indirect costs
c. Gross profit only
d. None of the above

Answer 1

The operating profit or loss of a segment in financial reporting should include both direct costs and indirect costs.

Step-by-step explanation:

The operating profit or loss of a segment in financial reporting should include both direct costs and indirect costs. Direct costs are easily identifiable costs that can be directly traced to a specific segment, such as the cost of raw materials used in production. Indirect costs, on the other hand, cannot be directly attributed to a specific segment and are allocated across multiple segments based on a predetermined allocation basis.

For example, let's say a company has two segments: Segment A and Segment B. Segment A has direct costs of $10,000 and indirect costs of $5,000. Segment B has direct costs of $8,000 and indirect costs of $3,000. The operating profit or loss of Segment A would be calculated as the revenue generated by Segment A minus both its direct costs ($10,000) and its allocated share of the indirect costs ($5,000). Similarly, the operating profit or loss of Segment B would be calculated as the revenue generated by Segment B minus both its direct costs ($8,000) and its allocated share of the indirect costs ($3,000).

Therefore, the correct answer is b. Direct costs and indirect costs.