Accounting for Departmental Operations
Departments are usually found in large business concerns. Even
small concerns have departments. Departmental stores in big
cities have usually many departments deals in one particular commodity like
footwear, baby clothing, household utensils, etc.
Departmentalization has many advantages, each department works under a departmental manager, and accounting is kept for each
department for the purpose of reporting to management, which can evaluate the
efficiency and profitability of each department. Further, departmental accounting helps management in planning which is indispensable in every form of
organization.
Reports for
Departmental Results
As mentioned before, accounting reports for departmental operations for internal use of management for control and planning. are Departmentalization is, therefore, carried to the extent which the management requires. The main purpose is to calculate gross profit and net profit for each department. This pinpoints the expenditure incurred in each department whose head is responsible for such expenditure and its control and successful operations.
Profit by Departments
A- In
a merchandising business, the gross profit figure is very important because of
the following reasons:
- · Sales and purchases being controlled by a departmental manager is important for control purposes.
- · Management may revise a sale mix to earn maximum profit, decide to change sales or purchase policies, and curtail or expand operations.
B- However,
care should be taken when planning to increase the gross profit of a
department, that as a result, operating expenses are not increased
dis-proportionately. If operating expenses increase more than the increase in.
gross profit, the effect will be a decrease in the net profit.
C- There
are two methods of determining profit and loss department wise. "They are:
- · To departmentalize every-head of account as far as possible and to record every transaction department-wise at the time of its recording.
- · To record transactions without reference to the department and then allocate them to various departments at the time of preparing the profit and loss account.
The second method is less accurate but has the advantage of
being less expensive.
Furthermore, there are some items that must be identified with
departments, e.g., merchandise inventory, purchases, sales, cash discounts,
returns and allowances, and salaries and wages of department employees.
Accounting may be maintained easily if columnar journals are maintained, the
transactions are recorded therefrom to other books of accounts department-wise.
However, there are some items, which it is difficult to identify with the
department benefited. Salaries of company officers are examples.
Apportionment of
Operating Expenses
A- Operating
expenses are of two kinds:
(i) those
identified with A. department
(ii) those,
which are not. The first one presents no difficulty while others sometimes
present difficulty in allocation to the department.
B- When
operating expenses are allocated, they should be apportioned to the respective
departments as nearly as possible in accordance with the cost of services
rendered to them. If requires the exercise of judgment which varies from person
to person, it should be based on sound justification.
C- Furthermore,
the cost of collection and analysis of data should not be excessive. Some of
the important items have been dealt with briefly.
Advertising Expenses
The analysis is made to find out the amount of expenditure
incurred for each department. The billboard advertising emphasizes the name and
the location of the company. It is, therefore, for the company as a whole, and
each department benefits from it. The allocation should be on the basis of the
amount of the sales of each department. In the case of newspaper advertising,
the expenditure should be allocated to each department according to the
percentage of space occupied by each department in the advertisements.
· Depreciation
of stores, equipment should be apportioned in proportion to the cost of
equipment in each department.
· Officer's
salaries and office salaries may be apportioned on:
1- Relative
time spent of each department; or
2- The number of sales transactions for each department.
· Heating
and lighting expenses. The basis is:
1- The
floor space, or
2- According
to the number of lights and their voltage. Rent expenses should be apportioned
according to the floor area occupied by each department.
- · Property tax expenses and insurance expenses are apportioned on the average cost of inventory of each department.
- · Un-collectible account expenses are apportioned on the basis of the analysis of debts of each department wrote off.
- · Miscellaneous selling expenses and miscellaneous general expenses are apportioned on the basis of sales of each
department.
Chart showing the basis of apportionment of operating expenses
Head of
Account
Basis of Allocation
1-Sales
salaries
According to the distribution shown
in
the payroll records
2. Advertising expenses
Amount of sales of each department.
i) Bill-board advertisement
Percentage of space occupied by each
ii) Newspaper advertisement
department in the advertisement.
3.Depreciation of stores equipment On
the cost of equipment in each department
4. Officers' salaries and office
Relative time spent on each department. (OR)
The
number of sales transactions
of each department
5. Heating and lighting expense According to the number of lights
or voltage.
6-Rent Expenses According
to the floor area.
7- Property tax expenses & According to the average cost of
Insurance
expenses each
department
8. Un-collectible account expenses.
On the basis of bad debts in each department.
9. Miscellaneous selling expenses and On
the basis of bad debts in each department
miscellaneous general expenses.
Departmental Profit and Loss Account
The following criticism is usually made against departmental
profit and loss account:
- · Allocation of income and expense items is done on an arbitrary basis and as such it loses its usefulness.
- · Departments are interlinked and dependent on one another, so the profit of one department is closely related to another.
Department Margin Approach for Income Reporting
In order to overcome these problems, expenses of a department
are divided into two categories, as given under:
- · Direct expenses, which are subject in the control of a departmental head, should be included in the departmental profit and loss account; and
- · Indirect expenses, which are not under the control of a department head and have to be allocated arbitrarily, should be excluded.
The advantages of the departmental margin profit and losses
account
- · Controlling expenses, thus maximizing profit by using responsibility accounting.
- · Evaluating the profitability and efficiency of a particular department.
- · Rendering aid to management in formulating its policy regarding expansion or discontinuance of an operation or a department
Discontinuation of A Department
While considering the continuance or discontinuance of the department has to consider the following basic points:
· How
for the indirect expenses will be reduced e.g. other departments will
profitably use the space vacated or the space vacated can be given up.
· As
the department is interlinked with other departments, what will be the effect
of its discontinuance on the sales of other departments or operations?
· The
redundancy of sales personnel.
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