Departmental Accounting PDF

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ACCOUNTING FOR DEPARTMENTAL OPERATIONS Departmental accounting enables responsibility accounting. It is a management tool that uses the organisation’s accounting system to hold people responsible for their work. It is logical that if you are in charge of a department, you should be responsible for that department. In departmental accounting, there are procedures that are used in responsibility accounting. Accuracy is emphasized in departmental accounting. The use of departmental accounting It is essential for the owner of a business to know the gross profit of the enterprise. This enables the owner to: 1. Identify the loss making department 2. Determine bonuses and possible salary increase 3. Decide which department to close Department

GP

G/loss

A

4000

B

3000

C

5000

D

nil

8000

E

6000

nil

Total

18000

8000

Decision on closing a department Before a decision to close D department above, the following questions should be raised: 

Consider the effect on the current income/profit[fixed costs effect]



Consider public relations with the clients[ newspapers , cards, sweets, coffee shop]

Allocation and apportionment of expenses There are expenses which can not be easily identified with departments. These should be apportioned using an appropriate basis. e.g. Floor area, number of employees, sales, or any other appropriate Allocation of expenses involves expenses which can be easily identified or classified under the departments. E.g Department wages. Zimbabwe Stores has three departments Details Inventory1 Jan 08 Purchases Inventory 31 Dec 08 Sales wages of assistants

Jewellery H/dres Clothing $ $ $ 2000 1500 3000 11000 3000 15000 3000 18000

2500 9000

4000 27000

2800

5000

6000

Common expenses Rent Admin expenses Air conditioning General expenses

3500 4800 2000 1200

Apportion rent, air conditioning expenses on the basis of floor space as follows: J 1/5, H ½ , C 3/10 Administration and general expenses to be shared on the basis of sales. Required Departmental SCI for the year ended 31 Dec 08. Solution J Sales O/Inventory Purchases C/inv

H 18000 -2000 -11000 3000

C 9000 -1500 -3000 2500

27000 -3000 -15000 4000

COGS GP less Expenses wages rent administration air conditioning general expenses Total expenses Retained income

-10000 8000

-2000 7000

-4000 13000

2800 700 1600 400 400 5900 2100

5000 1750 800 1000 200 8750 -1750

6000 1050 2400 600 600 10650 2350

Take home : The following balances were extracted from HJ ledger at 31 Aug 08. Department Sales Sales Opening inv

Dr A B

A B Purchases A B Wages of sales assistants[A] [B] Picture framing costs Office salaries insurance- buildings lighting /heating repairs to premises telephone cleaning accountancy fees office expenses

Cr 150000 100000

2500 2000 102000 76040 14400 13600 600 26400 720 1240 350 60 360 2980 1020

Inventories at 31 December 08 were valued as : A 1410, B 912 The proportion of the total floor area occupied by each department was: A 2/5, B 3/5

Area- fire insurance, lighting and heating, repairs, telephone, cleaning. Turnover- general office salaries, accountancy fees, general office expenses. Required HJ departmental SCI for the year ended 31 Dec 08. Another takehome From the following information provided by SJ for the year ended 31 March 05 prepare a departmental SCI for the ended 31 March 05.

Rent and business rates Delivery expenses Commission Insurance Purchases

Discount received Salaries and wages Advertising Sales

Depreciation Opening inventories

Administration expenses Closing inventory

A B C

A B C A B C A B C

9300 3600 10000 1800 101300 81200 62900 2454 91200 2307 180000 138000 82000 4200 27100 21410 17060 19800 23590 15360 18200

Except as follows, expenses are to be apportioned equally between the departments. Delivery expenses- proportionate sales Commision – 2 ½ of sales

Salaries and wages; insurance- 3:2:1 Discount received – 1%. Example WA operates an outdoor recreation store Mashcentral. The store carries two lines of merchandisecamping equipment and clothing. The following is an overall SCI for WA for the year ended 31 December 2010 Net sales

340000

Cost of goods sold Opening inventory

(11750)

Net purchases

(228900)

Cost of goods available for use

(240650)

Closing inventory

10250

Cost of goods sold

230400

Gross profit

109600

Interest income Income before operating expenses

1900 111500

Operating expenses Sales expenses Sales salaries

26000

Advertising costs

8000

Bade debts

3400

Depreciation –stores equipment

3600

Repairs expenses

1500

Other sales expenses

8000

Total sales expenses

502000

General expenses Office salaries

13500

Rent expense

6000

Depreciation –office equipment

1000

Insurance expense

3200

Office supplies expenses

1500

Other general expenses

4800

Total general expenses

30000

Total operating expenses

80200

Net operating income

31300

WA wants to apply responsibility accounting to the two departments and he has the following choices: can report on the basis of 1. Gross profit 2. Net operating income 3. Departmental margin These methods of reporting the department results will be as shown below. 1. Gross profit basis WA SCI for the year ended 31 December 2010 Total Net sales

Camping

Clothing

340000 204000

136000

(11750) 7150

4600

Cost of goods sold Opening inventory

Net purchases

(228900)

140500

88400

Cost of goods available for use

(240650)

146650

93000

Closing inventory

10250 6500

3750

Cost of goods sold

230400 141150

89250

Gross profit

109600 62850

46750

Interest income(other income) Income before operating expenses

1900 111500

Operating expenses Sales expenses Sales salaries

26000

Advertising costs

8000

Bade debts

3400

Depreciation –stores equipment

3600

Repairs expenses

1500

Other sales expenses

8000

Total sales expenses

502000

General expenses Office salaries

13500

Rent expense

6000

Depreciation –office equipment

1000

Insurance expense

3200

Office supplies expenses

1500

Other general expenses

4800

Total general expenses

30000

Total operating expenses

80200

Net operating income

31300

NB: Sales and Purchases are per actual information; also inventories. 2. Net operating income approach. WA SCI for the year ended 31 December 2010[ Net operating income basis] Total

Camping

Clothing

Total

Camping

Clothing

Net sales

340000

204000

136000

(11750)

7150

4600

Net purchases

(228900)

140500

88400

Cost of goods available for use

(240650)

146650

93000

Closing inventory

10250

6500

3750

Cost of goods sold

230400

141150

89250

Gross profit

109600

62850

46750

Cost of goods sold Opening inventory

Interest income(other income)

1900

Income before operating expenses

111500

Operating expenses Sales expenses Sales salaries

26000

15100

10900

Advertising costs

8000

4500

3500

Bade debts

3400

2040

1360

Depreciation –stores equipment

3600

2100

1500

Repairs expenses

1500

450

750

Other sales expenses

8000

4800

3200

Total sales expenses

502000

28990

21210

Office salaries

13500

6750

6750

Rent expense

6000

3480

2520

Depreciation –office equipment

1000

500

500

Insurance expense

3200

2045

1155

Office supplies expenses

1500

750

750

Other general expenses

4800

2784

2016

Total general expenses

30000

16309

13691

Total operating expenses

80200

45299

34901

Net operating income

31300

17551

11849

General expenses

Basis of apportioning expenses: 1.Sales salaries; based on salary records. 2. Advertising , based on space usedin the press; 3.TV advertising is based on minutes of airtime; 4. Depreciation is based on actual equipment in the department; 5. Stores supplies, based on net sales; 6. Office salaries, based on based on estimate time; 7. Rent, based on area occupied; 8. Property insurance, based on value of department buildings, 9.casuality insurance, based on net sales, 10. Other expenses, based on square feet.

4. Margin basis. Departmental margin analysis is the determination of the actual financial contribution of a specific department to firm. WA is illustrated below: WA SCI for the year ended 31 December 2010[ Margin basis]

Net sales

340000

204000

136000

(11750)

7150

4600

Net purchases

(228900)

140500

88400

Cost of goods available for use

(240650)

146650

93000

Closing inventory

10250

6500

3750

Cost of goods sold

230400

141150

89250

Gross profit

109600

62850

46750

26000

15100

10900

advertising

8000

4500

3500

Bad debts

3400

2040

1360

Depreciation-stores equip

3600

2100

1500

Repairs exp

1200

450

750

Stores supplies exp

8000

800

3200

Insurance exp

2500

1625

875

Total department expenses

52700

30615

22085

Departmental margin

56900

32235

24665

Cost of goods sold Opening inventory

Interest income(other income)

1900

Operating expenses Direct expenses Sales salaries

Indirect expenses Office salaries

13500

Rent expense

6000

Depreciation-office equip

1000

Insurance- casuality

700

Office supplies exp

1500

Other indirect expenses

4600

Total indirect exp

27500

Net operating income

31300

Practice Questions CB reported net sales of $700 000 and cost of sales $456 800 for the year ended 31 Dec 2010. You are provided with the following departmental information. Department

Net sales

Cost of sales

1

154000

91200

2

329000

234100

3

217000

131500

Operating expenses are as follows Sales salaries

50000

Office expenses

24000

Store supplies

22000

Office supplies

18000

Repairs

11500

Bad debts

14000

rent

12000

Other expenses

6000

Depreciation- store equipment

30000

Depreciation-office equipment

20000

Insurance- equipment

5000

Sales salaries are allocated on the basis of net sales; also are bad debts. Repairs are based on equipment value. Rent, floor area. Office salaries, time devoted. Property insurance, value in each department. Casuality insurance, net sales. Other expenses, floor area. Other needed data are as follows. Department

Area m2

Equipment value

Office time devoted

1

10000

200000

15%

2

14000

250000

65%

3

16000

50000

20%

Required CB Departmental Statement of comprehensive Income [ 20 marks...