1. Departmental Accounting
Chapter 24
Departmental Accounting
© 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater

2. Learning Objective 1
Preparing income statements focusing on gross profit by department
LO-1
© 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater

3. Profit Center
Unit or department that incurs costs and generates revenues
Exists for the purpose of making money for a business
LO-1
© 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater

4. Cost Center
Unit or department that incurs costs but does not generate revenues
Examples:
Maintenance
Housekeeping
Accounting
LO-1
© 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater

5. Problem24B-1 Cost of Goods Sold
See Slide 6, which follows, for calculation of Cost of Goods Sold amount
Cost of Goods Sold
© 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater

6. Problem24B-1 Merch. Inventory Jan. 1 Purch. Ret. & Allow.
Merch. Inventory Dec. 31
© 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater

7. Learning Objective 2
Preparing income statements focusing on departmental net income
LO-2
© 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater

8. Departmental Income from Operations
Direct Expenses – operating expenses that can be traced and identified directly to separate departments
Indirect Expenses – operating expenses that cannot be identified with a specific department, but with the company as a whole
LO-2
© 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater

9. Problem 24B-3
LO-2
© 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater

10. Problem 24B-3
LO-2
© 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater

11. Problem 24B-3
LO-2
© 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater

12. Problem 24B-3
LO-2
© 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater

13. Learning Objective 3
Preparing income statements focusing on departmental contribution margin
LO-3
© 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater

14. Contribution Margin
A department’s net profit, used to cover indirect expenses
Gross profit minus direct expenses
Expenses not controlled by the department manager are not used in evaluating departmental performance
LO-3
© 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater

15. Problem 24B-4 Departmental Expenses Salaries Expense Direct Indirect
Candy $750 $1,125
Indirect = ($18,000 / $40,000) x $2,500)
Grocery $1,500 $1,375
Indirect = ($22,000 / $40,000) x $2,500)
LO-3
© 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater

16. Problem 24B-4
Departmental Expenses Administrative Expense = Indirect Cost Candy: (20,000/50,000) x $7,500 = $3,000 Grocery: (30,000/50,000) x $7,500 = $4,500 Rent Expense = Indirect Cost Candy: (20,000/50,000) x $2,000 = $800 Grocery: (30,000/50,000) x $2,000 = $1,200
LO-3
© 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater

17. Problem 24B-4
See Slide 18, which follows for calculation of Cost of Goods Sold amount
LO-3
© 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater

18. Problem 24B-4 Cost of Goods Sold CANDY Beginning inventory $1,000
Add purchases ,250
Less discounts
Cost of goods available for sale 10,000
Less ending inventory 2,000
Cost of Goods Sold $8,000
Cost of Goods Sold
GROCERY
Beginning inventory $1,500
Add purchases ,450
Less discounts
Cost of goods available for sale 9,500
Less ending inventory ,500
Cost of Goods Sold $7,000
LO-3
© 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater

19. Problem 24B-4
LO-3
© 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater

20. Expanding/Reducing a Department
Determination involves researching financial reports
Other Factors
The effect of loss of contribution margin
Effect one department has in drawing customers to other departments
Industry trends - do competitors have department?
Can suppliers meet increasing demand for items?
LO-3
© 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater

21. Eliminating a Department
Eliminating departments with a net loss is not always a wise idea
Can cause greater loss in overall net income
LO-3
© 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater

22. End of Chapter 24
© 2010 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 11e by Slater