Operating segments are departments within a corporation that have both expenses and revenue as well as a clear record of that financial information. Accountants and executives review this information regularly to evaluate the segment's performance and its worth to the corporation. In accounting, eliminating an operating segment means eliminating the department, because its expenses exceed its revenue, and other segments can absorb its unavoidable costs. Accountants should consider eliminating an operating segment if its unavoidable costs exceed its revenue; in other situations, eliminating the segment may result in a loss for the corporation.
Create a standard table for operating segment analysis. Use columns to analyze individual operating segments, including the sum of all segments. Add rows to compare the segments' revenues, variable costs, contribution margins, fixed costs and operating incomes.
Target operating segments with negative operating incomes for elimination. Investigate these segments' fixed costs for avoidable and unavoidable costs. Avoidable costs disappear when you eliminate a segment, whereas unavoidable costs remain.
Divide the unavoidable costs of the poorly performing segments, and add them to the total of other segments' fixed costs.
Calculate the new total operating income of the corporation after dividing the unavoidable costs and eliminating the operating segment. If the divided unavoidable costs reduce the corporation's total operating income, choose another segment for elimination. If overall income improved, eliminate the segment.
- Photo Credit Hemera Technologies/Photos.com/Getty Images