Departmental Accounting
Chapter 25
25 - 1
Learning Objective 1
Preparing income statements
focusing on gross profit
by departments.
25 - 2
Learning Unit 25-1
Profit Centers
Cost Centers
25 - 3
Learning Unit 25-1
Catlin’s Department Store
Income Statement Showing Departmental Gross Profit
Year Ended December 31, 200x
Net Sales
Cost of Goods Sold
Gross Profit
Operating Expenses
Income Before Taxes
Income Tax Expense
Net Income
Children’s
$565,500
269,900
$295,600
Adult
$275,800
197,600
$ 78,200
Total
$841,300
467,500
$373,800
170,000
$203,800
89,520
$114,280
25 - 4
Learning Objective 2
Preparing income statements
focusing on departmental
net income.
25 - 5
Learning Unit 25-2
Direct expenses can be identified and traced
to specific departments.
 Indirect expenses cannot be specifically
traced to departments.
 These costs must be apportioned on the
basis of square footage or other allocation
bases.

25 - 6
Learning Unit 25-2

–
–
–
What are some examples of direct expenses?
sales salaries
delivery expense
advertising expense
25 - 7
Learning Unit 25-2

–
–
–
–
What are some examples of indirect expenses?
building
advertising expense (some may be apportioned)
depreciation
administration
25 - 8
Learning Unit 25-1
Catlin’s Department Store
Income Statement Showing Departmental Income
Year Ended December 31, 200x
Net Sales
Cost of Goods Sold
Gross Profit
Operating Expenses
Income Before Taxes
Income Tax Expense
Net Income
Children’s
$565,500
269,900
$295,600
114,500
$181,100
Adult
$275,800
197,600
$ 78,200
55,500
$ 22,700
Total
$841,300
467,500
$373,800
170,000
$203,800
89,520
$114,280
25 - 9
Learning Unit 25-2
Building Expense $16,000
Children’s
30,000 ÷ 40,000 = 75%
$16,000 × 75% =
$12,000
Adult
10,000 ÷ 40,000 = 25%
$16,000 × 25% =
$4,000
25 - 10
Learning Unit 25-2
Delivery Expense $10,000
Children’s
$10,000 × 60% =
$6,000
Adult
$10,000 × 40% =
$4,000
25 - 11
Learning Unit 25-2
Advertising Expense $3,000
Children’s
$3,000 × 2/3 =
$2,000
Adult
$3,000 × 1/3 =
$1,000
25 - 12
Learning Unit 25-2
Depreciation Expense $30,000
Children’s
$30,000 × 3/4 =
$22,500
Adult
$30,000 × 1/4 =
$7,500
25 - 13
Learning Unit 25-2
Administrative Expense $60,000
Children’s
$60,000 × 2/3 =
$40,000
Adult
$60,000 × 1/3 =
$20,000
25 - 14
Learning Unit 25-2
Catlin’s Department Store
Children’s
Adult
Direct Indirect Direct
Indirect
Expenses:
Salaries
Building
Delivery
Advertising
Depreciation
Administration
Total
$25,000
$15,000
$12,000
6,000
7,000
$ 4,000
4,000
4,000
2,000
1,000
22,500
7,500
40,000
20,000
$38,000 $76,500 $23,000 $32,500
25 - 15
Learning Objective 3
Preparing income statements
focusing on departmental
contribution margin.
25 - 16
Learning Unit 25-3
Contribution margin is the amount of
revenue available to cover indirect
expenses.
 Separation of direct costs from indirect
costs allows a better view of performance
levels of each department.

25 - 17
Learning Unit 25-3
Cost of goods sold is deducted first with the
remaining direct expenses deducted next.
 The balance remaining is the contribution
margin.
 Indirect expenses are deducted last to arrive
at the net income figure.

25 - 18
Learning Unit 25-3

Factors other than just dollar amounts of the
contribution margin and net income should
be considered before a decision is made to
discontinue a department.
25 - 19
Learning Unit 25-2
Catlin’s Department Store
Children’s
Net Sales
$565,500
Cost of Goods Sold
269,900
Gross Profit
$295,600
Direct Expenses
38,000
Contribution Margin $257,600
Indirect Expenses
Income Before Taxes
Income Tax Expense
Net Income
Adult
$275,800
197,600
$ 78,200
23,000
$ 55,200
Total
$841,300
467,500
$373,800
61,000
$312,800
109,000
$203,800
89,520
$114,280
25 - 20
End of Chapter 25
25 - 21