CHAPTER TWENTY-SEVEN DEPARTMENTAL ACCOUNTING

4Provides separate information about the revenues and expenses of each department 4Useful to management for three purposes: éPlanning éControl éPerformance evaluation 4Generally for internal financial statement users éOften only the income statement is prepared

Total Tennis Golf Annie’s Sporting Goods Income Statement For Years Ended December 31, 20-- Net sales Cost of goods sold Gross profit Operating expenses: Store clerks wages expense Truck drivers wages expense Advertising expense Store rent expense Bad debt expense 966,180 $1,075, ,280 $ 529,720 $640, ,900 $219,400 $ 80,250 83,900 79,500 22,800 17,900 $1,715,300 $ 749,120 Deprec. expense - delivery equip.24,000 Other operating expenses350,430 $ 658,780Total operating expenses Operating income$ 90,340 Sales, Cost of Goods Sold and Gross Profit are reported separately for each department.

Total Tennis Golf Annie’s Sporting Goods Income Statement For Years Ended December 31, 20-- Net sales Cost of goods sold Gross profit Operating expenses: Store clerks wages expense Truck drivers wages expense Advertising expense Store rent expense Bad debt expense 966,180 $1,075, ,280 $ 529,720 $640, ,900 $219,400 $ 80,250 83,900 79,500 22,800 17,900 $1,715,300 $ 749,120 Deprec. expense - delivery equip.24,000 Other operating expenses350,430 $ 658,780Total operating expenses Operating income$ 90,340 Gross Profit ÷ Net Sales $529,720 ÷ $1,075, %Gross profit percentages

Total Tennis Golf Annie’s Sporting Goods Income Statement For Years Ended December 31, 20-- Net sales Cost of goods sold Gross profit Operating expenses: Store clerks wages expense Truck drivers wages expense Advertising expense Store rent expense Bad debt expense 966,180 $1,075, ,280 $ 529,720 $640, ,900 $219,400 $ 80,250 83,900 79,500 22,800 17,900 $1,715,300 $ 749,120 Deprec. expense - delivery equip.24,000 Other operating expenses350,430 $ 658,780Total operating expenses Operating income$ 90,340 Gross Profit ÷ Net Sales $219,400 ÷ $640, %Gross profit percentages34.3%

Total Tennis Golf Annie’s Sporting Goods Income Statement For Years Ended December 31, 20-- Net sales Cost of goods sold Gross profit Operating expenses: Store clerks wages expense Truck drivers wages expense Advertising expense Store rent expense Bad debt expense 966,180 $1,075, ,280 $ 529,720 $640, ,900 $219,400 $ 80,250 83,900 79,500 22,800 17,900 $1,715,300 $ 749,120 Deprec. expense - delivery equip.24,000 Other operating expenses350,430 $ 658,780Total operating expenses Operating income$ 90,340 Golf is earning a much bigger gross profit percentage than Tennis. 49.3%Gross profit percentages34.3%

Total Tennis Golf Annie’s Sporting Goods Income Statement For Years Ended December 31, 20-- Net sales Cost of goods sold Gross profit Operating expenses: Store clerks wages expense Truck drivers wages expense Advertising expense Store rent expense Bad debt expense 966,180 $1,075, ,280 $ 529,720 $640, ,900 $219,400 $ 80,250 83,900 79,500 22,800 17,900 $1,715,300 $ 749,120 Deprec. expense - delivery equip.24,000 Other operating expenses350,430 $ 658,780Total operating expenses Operating income$ 90,340 This does not mean that Golf is more profitable overall, we must look at the departmental operating expenses. 49.3%Gross profit percentages34.3%

OPERATING EXPENSES 4Two classifications: éDirect Incurred for the sole benefit of and are traceable directly to a specific department Assigned to departments based on the actual expenses incurred éIndirect Incurred for the benefit of the business as a whole and cannot be traced directly to a specific department

Total Tennis Golf Annie’s Sporting Goods Income Statement For Years Ended December 31, 20-- Net sales Cost of goods sold Gross profit Operating expenses: Store clerks wages expense Truck drivers wages expense Advertising expense Store rent expense Bad debt expense 966,180 $1,075, ,280 $ 529,720 $640, ,900 $219,400 $ 80,250 83,900 79,500 22,800 17,900 $1,715,300 $ 749,120 Deprec. expense - delivery equip.24,000 Other operating expenses350,430 $ 658,780Total operating expenses Operating income$ 90,340 Annie’s employs five store clerks. Two work in the Golf department, one in the Tennis department and two assist customers in Both departments.

STORE CLERK WAGES EXPENSE Employee NumberDept.Wages 1Golf$19,000 2Golf17,000 3Tennis15,250 4Both13,000 5Both16,000 $80,250 $29,000 ($13,000 + $16,000) needs to be allocated between Golf and Tennis.

STORE CLERK WAGES EXPENSE Allocation is made based on percentage of total sales. GolfTennis Sales$1,075,000$640,300 Total Sales $1,715, %37.3%

STORE CLERKS WAGES EXPENSE Direct expense GolfTennisTotal $36,000 $15,250$51,250 Indirect expense allocation: 62.7% x$29,00018, % x $29,00010,817 $54,183$26,067$80,250

Total Tennis Golf Annie’s Sporting Goods Income Statement For Years Ended December 31, 20-- Net sales Cost of goods sold Gross profit Operating expenses: Store clerks wages expense Truck drivers wages expense Advertising expense Store rent expense Bad debt expense 966,180 $1,075, ,280 $ 529,720 $640, ,900 $219,400 $ 80,250 83,900 79,500 22,800 17,900 $1,715,300 $ 749,120 Deprec. expense - delivery equip.24,000 Other operating expenses350,430 $ 658,780Total operating expenses Operating income$ 90,340 $54,183$26,067

Total Tennis Golf Annie’s Sporting Goods Income Statement For Years Ended December 31, 20-- Net sales Cost of goods sold Gross profit Operating expenses: Store clerks wages expense Truck drivers wages expense Advertising expense Store rent expense Bad debt expense 966,180 $1,075, ,280 $ 529,720 $640, ,900 $219,400 $ 80,250 83,900 79,500 22,800 17,900 $1,715,300 $ 749,120 Deprec. expense - delivery equip.24,000 Other operating expenses350,430 $ 658,780Total operating expenses Operating income$ 90,340 $54,183$26,067 Annie’s has 3 drivers. 1 driver delivers only Golf equipment and 2 drivers deliver both.

TRUCK DRIVERS WAGES EXPENSE Direct expense GolfTennisTotal $29,000 $ 0$29,000 Salary of the one driver who delivers only Golf equipment.

TRUCK DRIVERS WAGES EXPENSE Direct expense GolfTennisTotal $29,000 $ 0$29,000 Indirect expense allocation: 70% x 30% x $54,900 The two other drivers are allocated based on the dollar amount of the Golf and Tennis equipment delivered. $54,900

TRUCK DRIVERS WAGES EXPENSE Direct expense GolfTennisTotal $29,000 $ 0$29,000 Indirect expense allocation: 70% x$54,90038,430 30% x $54,90016,470 $67,430$16,470$83,900

Total Tennis Golf Annie’s Sporting Goods Income Statement For Years Ended December 31, 20-- Net sales Cost of goods sold Gross profit Operating expenses: Store clerks wages expense Truck drivers wages expense Advertising expense Store rent expense Bad debt expense 966,180 $1,075, ,280 $ 529,720 $640, ,900 $219,400 $ 80,250 83,900 79,500 22,800 17,900 $1,715,300 $ 749,120 Deprec. expense - delivery equip.24,000 Other operating expenses350,430 $ 658,780Total operating expenses Operating income$ 90,340 $54,183$26,067 67,43016,470

Total Tennis Golf Annie’s Sporting Goods Income Statement For Years Ended December 31, 20-- Net sales Cost of goods sold Gross profit Operating expenses: Store clerks wages expense Truck drivers wages expense Advertising expense Store rent expense Bad debt expense 966,180 $1,075, ,280 $ 529,720 $640, ,900 $219,400 $ 80,250 83,900 79,500 22,800 17,900 $1,715,300 $ 749,120 Deprec. expense - delivery equip.24,000 Other operating expenses350,430 $ 658,780Total operating expenses Operating income$ 90,340 $54,183$26,067 67,43016,470 Annie’s advertising in both the newspaper and the radio

ADVERTISING EXPENSE NEWSPAPER RADIO GOLFTENNISMIXED Annie’s newspaper advertising is based on the number of inches of copy space. $17,000$12,000$16,000

ADVERTISING EXPENSE NEWSPAPER RADIO GOLFTENNISMIXED All the radio advertising is considered “mixed.” $17,000$12,000$16,000 34,500

ADVERTISING EXPENSE NEWSPAPER RADIO GOLFTENNISMIXED $17,000$12,000$16,000 34,500 $17,000 $12,000$50,500

ADVERTISING EXPENSE Direct expense GolfTennisTotal $17,000 $12,000$29,000 Indirect expense allocation: 62.7% x$50,50031, % x $50,50018,836 $31,664$18,836$79,500 The “mixed” costs are allocated based on the percentage of total sales.

Total Tennis Golf Annie’s Sporting Goods Income Statement For Years Ended December 31, 20-- Net sales Cost of goods sold Gross profit Operating expenses: Store clerks wages expense Truck drivers wages expense Advertising expense Store rent expense Bad debt expense 966,180 $1,075, ,280 $ 529,720 $640, ,900 $219,400 $ 80,250 83,900 79,500 22,800 17,900 $1,715,300 $ 749,120 Deprec. expense - delivery equip.24,000 Other operating expenses350,430 $ 658,780Total operating expenses Operating income$ 90,340 $54,183$26,067 67,43016,470 48,66430,836

Total Tennis Golf Annie’s Sporting Goods Income Statement For Years Ended December 31, 20-- Net sales Cost of goods sold Gross profit Operating expenses: Store clerks wages expense Truck drivers wages expense Advertising expense Store rent expense Bad debt expense 966,180 $1,075, ,280 $ 529,720 $640, ,900 $219,400 $ 80,250 83,900 79,500 22,800 17,900 $1,715,300 $ 749,120 Deprec. expense - delivery equip.24,000 Other operating expenses350,430 $ 658,780Total operating expenses Operating income$ 90,340 $54,183$26,067 67,43016,470 48,66430,836 Next we will split the rent.

STORE RENT EXPENSE Direct expense GolfTennisTotal Indirect expense allocation: 64% x$22,800$14,592 36% x $22,800 $8,208 8,208 $14,592$8,208$22,800 All of the rent is considered indirect (“mixed”) and will be allocated based on square foot of floor space.

Total Tennis Golf Annie’s Sporting Goods Income Statement For Years Ended December 31, 20-- Net sales Cost of goods sold Gross profit Operating expenses: Store clerks wages expense Truck drivers wages expense Advertising expense Store rent expense Bad debt expense 966,180 $1,075, ,280 $ 529,720 $640, ,900 $219,400 $ 80,250 83,900 79,500 22,800 17,900 $1,715,300 $ 749,120 Deprec. expense - delivery equip.24,000 Other operating expenses350,430 $ 658,780Total operating expenses Operating income$ 90,340 $54,183$26,067 67,43016,470 48,66430,836 14,5928,208

Total Tennis Golf Annie’s Sporting Goods Income Statement For Years Ended December 31, 20-- Net sales Cost of goods sold Gross profit Operating expenses: Store clerks wages expense Truck drivers wages expense Advertising expense Store rent expense Bad debt expense 966,180 $1,075, ,280 $ 529,720 $640, ,900 $219,400 $ 80,250 83,900 79,500 22,800 17,900 $1,715,300 $ 749,120 Deprec. expense - delivery equip.24,000 Other operating expenses350,430 $ 658,780Total operating expenses Operating income$ 90,340 $54,183$26,067 67,43016,470 48,66430,836 14,5928,208 9,0008,900 All are direct expenses and are assigned based on experience with accounts written off.

Total Tennis Golf Annie’s Sporting Goods Income Statement For Years Ended December 31, 20-- Net sales Cost of goods sold Gross profit Operating expenses: Store clerks wages expense Truck drivers wages expense Advertising expense Store rent expense Bad debt expense 966,180 $1,075, ,280 $ 529,720 $640, ,900 $219,400 $ 80,250 83,900 79,500 22,800 17,900 $1,715,300 $ 749,120 Deprec. Exp. - delivery equip.24,000 Other operating expenses350,430 $ 658,780Total operating expenses Operating income$ 90,340 $54,183$26,067 67,43016,470 48,66430,836 14,5928,208 9,0008,900 3 trucks 1 exclusively for Golf, other two used for both

DEPRECIATION EXPENSE - DELIVERY EQUIPMENT Direct expense GolfTennisTotal $ 9,000 $ 0$ 9,000 Indirect expense allocation: Depreciation on the one truck that is exclusively used for Golf equipment deliveries

DEPRECIATION EXPENSE - DELIVERY EQUIPMENT Direct expense GolfTennisTotal $ 9,000 $ 0$ 9,000 Indirect expense allocation: 70% x$15,00010,500 30% x $15,000$ 4,5004,500 $19,500$ 4,500$24,000 The other two trucks are allocated based on the dollar amount of equipment delivered.

Total Tennis Golf Annie’s Sporting Goods Income Statement For Years Ended December 31, 20-- Net sales Cost of goods sold Gross profit Operating expenses: Store clerks wages expense Truck drivers wages expense Advertising expense Store rent expense Bad debt expense 966,180 $1,075, ,280 $ 529,720 $640, ,900 $219,400 $ 80,250 83,900 79,500 22,800 17,900 $1,715,300 $ 749,120 Deprec. expense - delivery equip.24,000 Other operating expenses350,430 $ 658,780Total operating expenses Operating income$ 90,340 $54,183$26,067 67,43016,470 48,66430,836 14,5928,208 9,0008,900 19,5004,500

OTHER OPERATING EXPENSES Direct expense GolfTennisTotal $ 84,420 $ 31,980$116,400 Indirect expense allocation: 159,380234,030 $243,800$106,630$350,430 This broad range of expenses are assigned and allocated using many of the methods described previously. 74,650

Total Tennis Golf Annie’s Sporting Goods Income Statement For Years Ended December 31, 20-- Net sales Cost of goods sold Gross profit Operating expenses: Store clerks wages expense Truck drivers wages expense Advertising expense Store rent expense Bad debt expense 966,180 $1,075, ,280 $ 529,720 $640, ,900 $219,400 $ 80,250 83,900 79,500 22,800 17,900 $1,715,300 $ 749,120 Deprec. expense - delivery equip.24,000 Other operating expenses350,430 $ 658,780Total operating expenses Operating income$ 90,340 $54,183$26,067 67,43016,470 48,66430,836 14,5928,208 9,0008,900 19,5004, ,800106,630

Total Tennis Golf Annie’s Sporting Goods Income Statement For Years Ended December 31, 20-- Net sales Cost of goods sold Gross profit Operating expenses: Store clerks wages expense Truck drivers wages expense Advertising expense Store rent expense Bad debt expense 966,180 $1,075, ,280 $ 529,720 $640, ,900 $219,400 $ 80,250 83,900 79,500 22,800 17,900 $1,715,300 $ 749,120 Deprec. expense - delivery equip.24,000 Other operating expenses350,430 $ 658,780Total operating expenses Operating income$ 90,340 $54,183$26,067 67,43016,470 48,66430,836 14,5928,208 9,0008,900 19,5004, ,800106,630 $ 457,169$ 201,611 $ 72,551$ 17,789 Operating Income Percentages: Golf $72,551 ÷ $1,075,000 = 6.7% Tennis $17,789 ÷ $640,300 = 2.8% Just as with the Gross Profit %, Golf is more profitable than Tennis.

Total Tennis Golf Annie’s Sporting Goods Income Statement For Years Ended December 31, 20-- Net sales Cost of goods sold Gross profit Operating expenses: Store clerks wages expense Truck drivers wages expense Advertising expense Store rent expense Bad debt expense 966,180 $1,075, ,280 $ 529,720 $640, ,900 $219,400 $ 80,250 83,900 79,500 22,800 17,900 $1,715,300 $ 749,120 Deprec. expense - delivery equip.24,000 Other operating expenses350,430 $ 658,780Total operating expenses Operating income$ 90,340 $54,183$26,067 67,43016,470 48,66430,836 14,5928,208 9,0008,900 19,5004, ,800106,630 $ 457,169$ 201,611 $ 72,551$ 17,789 Operating Expense Percentages: Golf $457,169 ÷ $1,075,000 = 42.5% Tennis $201,611 ÷ $640,300 = 31.5%

DIRECT OPERATING MARGIN 4Difference between a department’s gross profit and its direct operating expenses 4Indirect expenses are then subtracted from the total direct operating margin to calculated operating income éIndirect expenses are not allocated to specific departments

Total Tennis Golf Annie’s Sporting Goods Income Statement For Years Ended December 31, 20-- Net sales Cost of goods sold Gross profit Direct operating expenses: Store clerks wages expense Truck drivers wages expense Advertising expense Total direct operating expenses Bad debt expense 966,180 $1,075, ,280 $ 529,720 $640, ,900 $219,400 $ 51,250 29,000 17,900 9, ,400 $1,715,300 $ 749,120 Deprec. expense - delivery equip. Other operating expenses $ 252,550 Dept. direct operating margin $36,000$15,250 29,000 12,00017,000 8,900 9,000 84,42031,980 $ 184,420$ 68,130 $151,270 29,000 9,000 $ 345,300$ 496,570 Indirect operating expenses: Store clerks wages expense$ 29,000 Direct Operating Margin helps us evaluate departmental performance.

Total Tennis Golf Annie’s Sporting Goods Income Statement For Years Ended December 31, 20-- Net sales Cost of goods sold Gross profit Direct operating expenses: Store clerks wages expense Truck drivers wages expense Advertising expense Total direct operating expenses Bad debt expense 966,180 $1,075, ,280 $ 529,720 $640, ,900 $219,400 $ 51,250 29,000 17,900 9, ,400 $1,715,300 $ 749,120 Deprec. expense - delivery equip. Other operating expenses $ 252,550 Dept. direct operating margin $36,000$15,250 29,000 12,00017,000 8,900 9,000 84,42031,980 $ 184,420$ 68,130 $151,270 29,000 9,000 $ 345,300$ 496,570 Indirect operating expenses: Store clerks wages expense$ 29,000 Direct Operating Margin percentage Golf $345,300 ÷ $1,075,000 = 32.1% Tennis $151,270 ÷ $640,300 = 23.6% Golf is once again better! Is it because of the Gross Profit or Operating Expenses or both?

Total Tennis Golf Annie’s Sporting Goods Income Statement For Years Ended December 31, 20-- Net sales Cost of goods sold Gross profit Direct operating expenses: Store clerks wages expense Truck drivers wages expense Advertising expense Total direct operating expenses Bad debt expense 966,180 $1,075, ,280 $ 529,720 $640, ,900 $219,400 $ 51,250 29,000 17,900 9, ,400 $1,715,300 $ 749,120 Deprec. expense - delivery equip. Other operating expenses $ 252,550 Dept. direct operating margin $36,000$15,250 29,000 12,00017,000 8,900 9,000 84,42031,980 $ 184,420$ 68,130 $151,270 29,000 9,000 $ 345,300$ 496,570 Indirect operating expenses: Store clerks wages expense$ 29,000 Direct Operating Expense percentage Golf $184,420 ÷ $1,075,000 = 17.2% Tennis $68,130 ÷ $640,300 = 10.6% This time Tennis is better! Tennis is more effectively controlling their expenses, but with Golf’s better Gross Profit, Golf still ended with a better Direct Operating Margin.

Total Tennis Golf Annie’s Sporting Goods Income Statement For Years Ended December 31, 20-- Net sales Cost of goods sold Gross profit Direct operating expenses: Store clerks wages expense Truck drivers wages expense Advertising expense Total direct operating expenses Bad debt expense 966,180 $1,075, ,280 $ 529,720 $640, ,900 $219,400 $ 51,250 29,000 17,900 9, ,400 $1,715,300 $ 749,120 Deprec. expense - delivery equip. Other operating expenses $ 252,550 Dept. direct operating margin $36,000$15,250 29,000 12,00017,000 8,900 9,000 84,42031,980 $ 184,420$ 68,130 $151,270 29,000 9,000 $ 345,300$ 496,570 Indirect operating expenses: Store clerks wages expense$ 29,000 Direct Operating Margin also helps us determine the contribution a department makes to the overall operating income of the company.

Truck drivers wages expense Advertising expense Total direct operating expenses Store rent expense 54,900 50,500 15, ,030 Deprec. expense - delivery equip. Other operating expenses $ 252,550 Dept. direct operating margin $ 406,230 $ 184,420 $ 68,130 $151,270 22,800 $ 345,300$ 496,570 Indirect operating expenses: Store clerks wages expense$ 29,000 $ 90,340 Total indirect operating exp. Operating income Tennis department contributes $151,270 to help cover the indirect operating expenses.

DISCONTINUING A DEPARTMENT 4Management must focus on the revenues and expenses that will be eliminated if a department is discontinued. éNeed to look at the Direct Operating Margin. éIndirect expenses are usually for the whole business and therefore will not be reduced when a department is discontinued.

DISCONTINUING A DEPARTMENT Net Sales Cost of Goods Sold Gross Margin Direct Operating Expenses Dept. Direct Oper. Margin Indirect Operating Expenses Operating income (loss) Dept ADept BDept C $210,000$185,000$170,000 Total $565, ,000110,00096,000321,000 $ 95,000$ 75,000$ 74,000$244,000 55,00045,00054,000154,000 $ 40,000$ 30,000$ 20,000$ 90,000 27,00022,00025,00074,000 $ 13,000$ 8,000$ (5,000)$ 16,000 Given the Net Loss, management is considering discontinuing Dept. C.

DISCONTINUING A DEPARTMENT Net Sales Cost of Goods Sold Gross Margin Direct Operating Expenses Dept. Direct Oper. Margin Indirect Operating Expenses Operating income (loss) Dept ADept BDept C $210,000$185,000$170,000 Total $565, ,000110,00096,000321,000 $ 95,000$ 75,000$ 74,000$244,000 55,00045,00054,000154,000 $ 40,000$ 30,000$ 20,000$ 90,000 27,00022,00025,00074,000 $ 13,000$ 8,000$ (5,000)$ 16,000 But Dept. C contributes $20,000 to cover the indirect expenses!!! Without it, profits would be even worse!!