Chapter 25
Departmental
Accounting
Dividing Companies into
Subdivisions or Departments
• Benefits companies with different business
activities
• Enables the company’s management to
delegate authority to departmental managers
– Holds departmental managers responsible for their
respective departments
• Enables management to measure profitability of
each department
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Why Analyze
Profitability by Department
• Gives a more complete picture of the business
• Allows managers to make improvements or cut
an unprofitable activity altogether
• Allows for expansion of departments that are
doing well
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Gross Profit by Departments
• Net Sales – Cost of Goods
Sold = Gross Profit
• Requires separate records
for each department
through gross profit
– Separate general
ledger accounts for
each, or
– Apportionment of one
general ledger account
to the various
departments
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From Sales Through
Gross Profit
Revenue from Sales
– Cost of Goods Sold
= Gross Profit
– Operating Expenses
= Income from Operations
+ Other Income
– Other Expenses
= Income Before Income Tax
– Income Tax Expense
= Net Income
The accounts below Gross Profit
are not departmentalized.
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Separate Accounts by Department
• Yields the most accurate accounting data
Separate accounts for:
Sales
Sales Returns and Allowances
Sales Discounts
Purchases
Purchases Returns and Allowances
Purchases Discounts
Freight In
Merchandise Inventory
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Departmental Work Sheet
• Has separate Income Statement columns for
each department to facilitate the correct
apportionment of revenues and expenses
• Has separate Income Statement columns for
nondepartmental items
– Hold Other Income and Other Expenses that are not
directly assigned to departments
• Final column totals all the departments to show
the overall income statement for the firm
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Departmental Income Statement
Extended Through Income from Operations
• Requires separate records
for each department
through Income from
Operations
– Separate general
ledger accounts for
each, or
– Apportionment of one
general ledger account
to the various
departments
From Sales Through
Income from Operations
Revenue from Sales
– Cost of Goods Sold
= Gross Profit
– Operating Expenses
= Income from Operations
+ Other Income
– Other Expenses
= Income Before Income Tax
– Income Tax Expense
= Net Income
The accounts below Income from
Operations are not
departmentalized.
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Apportionment of Expenses
Allocating operating expenses among
various operating departments
• Expenses that benefit different departments
must be allocated to those departments.
– Example: Janitorial salary expense for a janitor
that cleans all departments
• There are many bases for apportioning
expenses.
– For the janitor in our example, a logical
apportionment is square feet used by each
department.
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Expenses That
Do Not Need to Be Apportioned
• Items that are clearly within a single department
• Examples:
– A salesperson’s salary is apportioned to Sales.
– Advertising expenses for each specific product are
accounted for in the specific department that sold it.
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Calculating the Percentage of
Allocation When There Are Parts to the Whole
Part of the Whole
Whole
Total Expense to Be
x
=
Apportioned
Apportionment of
Total Expense
for Each Department
© Royalty Free C Squared Studios/ Getty Images
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Bases for Apportioning Expenses
Among Operating Departments
–
–
–
–
–
–
Gross sales
Advertising space
Square footage of floor space
Amounts in the payroll register
Amounts in the equipment ledger
Many more . . .
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Allocating Costs: Illustration
Jones & Co. operates Department A and
Department B.
– Sales salaries are assigned to the appropriate
department according to the payroll register.
– Advertising expenses for billboard ads are allocated
according to percentage of gross sales, and expenses
for newspaper ads are allocated according to number
of column inches each department used.
– Other Expenses are allocated on reasonable
allocation bases such as floor space, use of
equipment, and so forth.
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Allocating Billboard Ads:
Jones & Co.
Total Billboard Advertising Expense = $1,600
Sales for Dept. A
Sales for Dept. B
Total Sales
$560,000
240,000
$800,000
Allocation
Base: Sales
Dept. A: $560,000 / $800,000 = 70%
Dept. B: $240,000 / $800,000 = 30%
Dept. A’s share of billboard ads: 70% x $1,600 = $1,120
Dept. B’s share of billboard ads: 30% x $1,600 = $480
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Allocating Newspaper Ads:
Jones & Co.
Total Newspaper Advertising Expense = $9,600
Allocation Base: Column Inches
Dept. A: 1,920 column inches 1,920 / 3,200 = 60%
Dept. B: 1,280 column inches 1,280 / 3,200 = 40%
Dept. A’s share of newspaper ads: 60% x $9,600 = $5,760
Dept. B’s share of newspaper ads: 40% x $9,600 = $3,840
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Departmental Margin
• The contribution that a given department makes
to the income of the firm
– Gross profit of a department minus the department’s
direct expenses
• When a company breaks down its expense
figures on a departmental-margin basis, its
income statement indicates the contribution
each department makes toward the overhead
expenses incurred on behalf of the business as
a whole.
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Direct and Indirect Expenses
• Direct expenses
– Expenses that benefit only one department and are
controlled by the head of the department
• Example: Sales department salary
• Indirect expenses
– Overhead expenses that benefit several departments
or the business as a whole and are not under the
control of any one department head
• Example: Property tax on real estate
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Expenses That Are Partially
Direct and Partially Indirect
• Example for a manufacturing firm that uses
departmental accounting:
– Advertising for the firm in general may be an indirect
expense.
– Advertising for the individual products being sold are
more than likely direct expenses.
• Rule of thumb to identify direct expenses:
– If the department were not in existence, then the
expense would not be in existence.
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Outline of Income Statement That
Emphasizes Departmental Margin
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Meaning of Departmental Margin
• Departmental margin is the most realistic
portrayal of the profitability of a department.
• If the company closes the department:
– The company’s income before income tax will
decrease or increase by the amount of the
departmental margin.
– The indirect expenses that the department was
covering will now have to be covered by the other
departments.
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When Should a
Department Be Closed?
• As long as there is some departmental margin,
the department should remain open.
– Any positive departmental margin helps to cover
indirect expenses!
• When departmental margins fall below zero, all
things being equal, it may be time to shut down
the department.
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Usefulness of
Departmental Margin
• The company can hold the head of a given
department accountable for expenses directly
chargeable to that department.
• Manufacturing companies can analyze product
profitability more clearly.
• Companies can use the information that
departmental margins provide to make better
decisions about shutting down or expanding.
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Demonstration Problem
• As the accountants for Gel Boomerangs, we will
construct an income statement showing income
from operations by department.
• Gel Boomerangs has three departments:
– Wood Boomerangs
– Plastic Boomerangs
– Boomerang Demonstrations
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24 | 37
Gel Boomerangs
Income Statement
For Year Ended December 31, 20—
Wood
Plastic
Boomerangs Boomerangs
Revenues from Sales:
Sales
Less: Sales Returns and Allowances
Net Sales
Cost of Goods Sold:
Gross Profit
Operating Expenses:
Selling Expenses:
Sales Salary Expense
Advertising Expense
Depreciation Expense, Office Equipment
Total Selling Expenses
General Expenses:
Depreciation Expense, Shop Equipment
Rent Expense
Utilities Expense
Insurance Expense
Bad Debts Expense
Total General Expenses
Total Operating Expenses
Income from Operations
Other Income:
Investment Income
Net Income
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$
$
$
220,100.00 $
6,603.00
213,497.00 $
-
$
Boomerang
Demonstrations
50,550.00 $
1,516.50
49,033.50 $
Totals
29,000.00 $ 299,650.00
8,119.50
29,000.00 $ 291,530.50
-
24 | 38
Gel Boomerangs
Income Statement
For Year Ended December 31, 20—
Wood
Plastic
Boomerangs Boomerangs
Revenues from Sales:
Sales
Less: Sales Returns and Allowances
Net Sales
Cost of Goods Sold:
Gross Profit
Operating Expenses:
Selling Expenses:
Sales Salary Expense
Advertising Expense
Depreciation Expense, Office Equipment
Total Selling Expenses
General Expenses:
Depreciation Expense, Shop Equipment
Rent Expense
Utilities Expense
Insurance Expense
Bad Debts Expense
Total General Expenses
Total Operating Expenses
Income from Operations
Other Income:
Investment Income
Net Income
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$
$
$
$
220,100.00 $
6,603.00
213,497.00 $
98,520.00
114,977.00 $
-
$
Boomerang
Demonstrations
50,550.00 $
1,516.50
49,033.50 $
27,500.00
21,533.50 $
Totals
29,000.00 $ 299,650.00
8,119.50
29,000.00 $ 291,530.50
126,020.00
29,000.00 $ 165,510.50
-
24 | 39
Gel Boomerangs
Income Statement
For Year Ended December 31, 20—
Wood
Plastic
Boomerangs Boomerangs
Revenues from Sales:
Sales
Less: Sales Returns and Allowances
Net Sales
Cost of Goods Sold:
Gross Profit
Operating Expenses:
Selling Expenses:
Sales Salary Expense
Advertising Expense
Depreciation Expense, Office Equipment
Total Selling Expenses
General Expenses:
Depreciation Expense, Shop Equipment
Rent Expense
Utilities Expense
Insurance Expense
Bad Debts Expense
Total General Expenses
Total Operating Expenses
Income from Operations
Other Income:
Investment Income
Net Income
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$
Boomerang
Demonstrations
Totals
220,100.00 $
6,603.00
213,497.00 $
98,520.00
114,977.00 $
50,550.00 $
1,516.50
49,033.50 $
27,500.00
21,533.50 $
29,000.00 $ 299,650.00
8,119.50
29,000.00 $ 291,530.50
126,020.00
29,000.00 $ 165,510.50
$
17,246.55 $
2,500.00
1,013.13
20,759.68 $
3,876.03 $
500.00
531.87
4,907.90 $
13,950.00 $ 35,072.58
3,050.00
6,050.00
1,545.00
17,000.00 $ 42,667.58
$
-
-
$
$
$
$
24 | 40
Gel Boomerangs
Income Statement
For Year Ended December 31, 20—
Wood
Plastic
Boomerangs Boomerangs
Revenues from Sales:
Sales
Less: Sales Returns and Allowances
Net Sales
Cost of Goods Sold:
Gross Profit
Operating Expenses:
Selling Expenses:
Sales Salary Expense
Advertising Expense
Depreciation Expense, Office Equipment
Total Selling Expenses
General Expenses:
Depreciation Expense, Shop Equipment
Rent Expense
Utilities Expense
Insurance Expense
Bad Debts Expense
Total General Expenses
Total Operating Expenses
Income from Operations
Other Income:
Investment Income
Net Income
$
$
$
$
$
$
$
$
Boomerang
Demonstrations
Totals
220,100.00 $
6,603.00
213,497.00 $
98,520.00
114,977.00 $
50,550.00 $
1,516.50
49,033.50 $
27,500.00
21,533.50 $
29,000.00 $ 299,650.00
8,119.50
29,000.00 $ 291,530.50
126,020.00
29,000.00 $ 165,510.50
17,246.55 $
2,500.00
1,013.13
20,759.68 $
3,876.03 $
500.00
531.87
4,907.90 $
13,950.00 $ 35,072.58
3,050.00
6,050.00
1,545.00
17,000.00 $ 42,667.58
2,001.34 $
6,295.18
1,180.35
2,032.82
391.48
11,901.16 $
32,660.84 $
1,050.66
3,304.82
619.65
1,067.18
205.52
6,247.84 $
11,155.74 $
$
3,052.00
9,600.00
100.00
1,900.00
1,400.00
4,500.00
597.00
1,500.00 $ 19,649.00
18,500.00 $ 62,316.58
Some totals appear to be off by 1 cent due to rounding.
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Gel Boomerangs
Income Statement
For Year Ended December 31, 20—
Wood
Plastic
Boomerangs
Boomerangs
Revenues from Sales:
Sales
Less: Sales Returns and Allowances
Net Sales
Cost of Goods Sold:
Gross Profit
Operating Expenses:
Selling Expenses:
Sales Salary Expense
Advertising Expense
Depreciation Expense, Office Equipment
Total Selling Expenses
General Expenses:
Depreciation Expense, Shop Equipment
Rent Expense
Utilities Expense
Insurance Expense
Bad Debts Expense
Total General Expenses
Total Operating Expenses
Income from Operations
Other Income:
Investment Income
Net Income
$
$
$
$
$
$
$
$
$
Boomerang
Demonstrations
Totals
220,100.00 $
6,603.00
213,497.00 $
98,520.00
114,977.00 $
50,550.00 $
1,516.50
49,033.50 $
27,500.00
21,533.50 $
29,000.00 $ 299,650.00
8,119.50
29,000.00 $ 291,530.50
126,020.00
29,000.00 $ 165,510.50
17,246.55 $
2,500.00
1,013.13
20,759.68 $
3,876.03 $
500.00
531.87
4,907.90 $
13,950.00 $ 35,072.58
3,050.00
6,050.00
1,545.00
17,000.00 $ 42,667.58
1,050.66
3,304.82
619.65
1,067.18
205.52
6,247.84 $
11,155.74 $
10,377.76 $
$
2,001.34
6,295.18
1,180.35
2,032.82
391.48
11,901.16
32,660.84
82,316.16
$
$
$
$
100.00
1,400.00
1,500.00
18,500.00
10,500.00
3,052.00
9,600.00
1,900.00
4,500.00
597.00
$ 19,649.00
$ 62,316.58
$ 103,193.92
Some totals appear to be off by 1 cent due to rounding.
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Gel Boomerangs
Income Statement
For Year Ended December 31, 20—
Wood
Plastic
Boomerangs Boomerangs
Revenues from Sales:
Sales
Less: Sales Returns and Allowances
Net Sales
Cost of Goods Sold:
Gross Profit
Operating Expenses:
Selling Expenses:
Sales Salary Expense
Advertising Expense
Depreciation Expense, Office Equipment
Total Selling Expenses
General Expenses:
Depreciation Expense, Shop Equipment
Rent Expense
Utilities Expense
Insurance Expense
Bad Debts Expense
Total General Expenses
Total Operating Expenses
Income from Operations
Other Income:
Investment Income
Net Income
$
$
$
$
$
$
$
$
$
Boomerang
Demonstrations
Totals
220,100.00 $
6,603.00
213,497.00 $
98,520.00
114,977.00 $
50,550.00 $
1,516.50
49,033.50 $
27,500.00
21,533.50 $
29,000.00 $ 299,650.00
8,119.50
29,000.00 $ 291,530.50
126,020.00
29,000.00 $ 165,510.50
17,246.55 $
2,500.00
1,013.13
20,759.68 $
3,876.03 $
500.00
531.87
4,907.90 $
13,950.00 $ 35,072.58
3,050.00
6,050.00
1,545.00
17,000.00 $ 42,667.58
1,050.66
3,304.82
619.65
1,067.18
205.52
6,247.84 $
11,155.74 $
10,377.76 $
$
2,001.34
6,295.18
1,180.35
2,032.82
391.48
11,901.16
32,660.84
82,316.16
$
$
$
$
100.00
1,400.00
1,500.00
18,500.00
10,500.00
3,052.00
9,600.00
1,900.00
4,500.00
597.00
$ 19,649.00
$ 62,316.58
$ 103,193.92
$ 2,010.00
$ 105,203.92
Some totals appear to be off by 1 cent due to rounding.
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Chapter Review
1. Compile a departmental income statement
extended through Gross Profit.
2. Compile a departmental work sheet.
3. Compile a departmental income statement
extended through Income from Operations.
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Chapter Review (cont’d)
4. Apportion operating expenses among various
operating departments.
5. Compile a departmental income statement
extended through departmental margin.
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