chapter twenty-seven departmental accounting. 4provides separate information about the revenues and...

CHAPTER TWENTY-SEVEN

DEPARTMENTAL ACCOUNTING

Provides separate information about the revenues and expenses of each department

Useful to management for three purposes:Planning ControlPerformance evaluation

Generally for internal financial statement usersOften only the income statement is prepared

TotalTennisGolf

Annie’s Sporting GoodsIncome Statement

For Years Ended December 31, 20--

Net salesCost of goods soldGross profit

Operating expenses:Store clerks wages expenseTruck drivers wages expenseAdvertising expenseStore rent expenseBad debt expense

966,180$1,075,000

545,280$ 529,720

$640,300420,900

$219,400

$ 80,25083,90079,50022,80017,900

$1,715,300

$ 749,120

Deprec. expense - delivery equip. 24,000Other operating expenses 350,430

$ 658,780Total operating expensesOperating income $ 90,340

Sales, Cost of Goods Sold and Gross Profitare reported separately for each department.

TotalTennisGolf

966,180$1,075,000

545,280$ 529,720

$640,300420,900

$219,400

$ 80,25083,90079,50022,80017,900

$1,715,300

$ 749,120

Gross Profit ÷ Net Sales$529,720 ÷ $1,075,000

49.3%Gross profit percentages

TotalTennisGolf

966,180$1,075,000

545,280$ 529,720

$640,300420,900

$219,400

$ 80,25083,90079,50022,80017,900

$1,715,300

$ 749,120

Gross Profit ÷ Net Sales$219,400 ÷ $640,300

49.3%Gross profit percentages 34.3%

TotalTennisGolf

966,180$1,075,000

545,280$ 529,720

$640,300420,900

$219,400

$ 80,25083,90079,50022,80017,900

$1,715,300

$ 749,120

Golf is earning a much biggergross profit percentage than Tennis.

TotalTennisGolf

966,180$1,075,000

545,280$ 529,720

$640,300420,900

$219,400

$ 80,25083,90079,50022,80017,900

$1,715,300

$ 749,120

This does not mean that Golf ismore profitable overall, we must look

at the departmental operating expenses.

OPERATING EXPENSES

Two classifications:Direct

• Incurred for the sole benefit of and are traceable directly to a specific department

• Assigned to departments based on the actual expenses incurred

Indirect• Incurred for the benefit of the business as a whole

and cannot be traced directly to a specific department

TotalTennisGolf

966,180$1,075,000

545,280$ 529,720

$640,300420,900

$219,400

$ 80,25083,90079,50022,80017,900

$1,715,300

$ 749,120

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 Number Dept. Wages

1 Golf $19,000

2 Golf 17,000

3 Tennis 15,250

4 Both 13,000

5 Both 16,000$80,250

$29,000 ($13,000 + $16,000) needs to beallocated between Golf and Tennis.

STORE CLERK WAGES EXPENSE

Allocation is made based onpercentage of total sales.

Golf Tennis

Sales $1,075,000 $640,300Total Sales $1,715,300 $1,715,300

62.7% 37.3%

STORE CLERKS WAGES EXPENSE

Direct expenseGolf Tennis Total

$36,000 $15,250 $51,250

Indirect expense allocation:62.7% x $29,000 18,183 18,183

37.3% x $29,000 10,817 10,817

$54,183 $26,067 $80,250

TotalTennisGolf

966,180$1,075,000

545,280$ 529,720

$640,300420,900

$219,400

$ 80,25083,90079,50022,80017,900

$1,715,300

$ 749,120

$54,183 $26,067

TotalTennisGolf

966,180$1,075,000

545,280$ 529,720

$640,300420,900

$219,400

$ 80,25083,90079,50022,80017,900

$1,715,300

$ 749,120

$54,183 $26,067

Annie’s has 3 drivers.1 driver delivers only Golf equipment

and 2 drivers deliver both.

TRUCK DRIVERS WAGES EXPENSE

$29,000 $ 0 $29,000

Salary of the one driver whodelivers only Golf equipment.

$29,000 $ 0 $29,000

Indirect expense allocation:70% x

30% x $54,900

The two other drivers are allocatedbased on the dollar amount of the

Golf and Tennis equipment delivered.

$54,900

$29,000 $ 0 $29,000

Indirect expense allocation:70% x $54,900 38,430 38,430

30% x $54,900 16,470 16,470

$67,430 $16,470 $83,900

TotalTennisGolf

966,180$1,075,000

545,280$ 529,720

$640,300420,900

$219,400

$ 80,25083,90079,50022,80017,900

$1,715,300

$ 749,120

$54,183 $26,06767,430 16,470

TotalTennisGolf

966,180$1,075,000

545,280$ 529,720

$640,300420,900

$219,400

$ 80,25083,90079,50022,80017,900

$1,715,300

$ 749,120

$54,183 $26,06767,430 16,470

Annie’s advertising in both thenewspaper and the radio

ADVERTISING EXPENSE

NEWSPAPER

GOLF TENNIS MIXED

Annie’s newspaper advertisingis based on the number of

inches of copy space.

$17,000 $12,000 $16,000

ADVERTISING EXPENSE

NEWSPAPER

GOLF TENNIS MIXED

All the radio advertisingis considered “mixed.”

$17,000 $12,000 $16,000

34,500

ADVERTISING EXPENSE

NEWSPAPER

GOLF TENNIS MIXED$17,000 $12,000 $16,000

34,500$17,000 $12,000 $50,500

ADVERTISING EXPENSE

$17,000 $12,000 $29,000

Indirect expense allocation:62.7% x $50,500 31,664 31,664

37.3% x $50,500 18,836 18,836

$31,664 $18,836 $79,500

The “mixed” costs are allocatedbased on the percentage of total sales.

TotalTennisGolf

966,180$1,075,000

545,280$ 529,720

$640,300420,900

$219,400

$ 80,25083,90079,50022,80017,900

$1,715,300

$ 749,120

$54,183 $26,06767,430 16,47048,664 30,836

TotalTennisGolf

966,180$1,075,000

545,280$ 529,720

$640,300420,900

$219,400

$ 80,25083,90079,50022,80017,900

$1,715,300

$ 749,120

$54,183 $26,06767,430 16,47048,664 30,836

Next we will split the rent.

STORE RENT EXPENSE

Indirect expense allocation:64% x $22,800 $14,592 $14,592

36% x $22,800 $8,208 8,208

$14,592 $8,208 $22,800

All of the rent is consideredindirect (“mixed”) and will be

allocated based on square foot of floor space.

TotalTennisGolf

966,180$1,075,000

545,280$ 529,720

$640,300420,900

$219,400

$ 80,25083,90079,50022,80017,900

$1,715,300

$ 749,120

$54,183 $26,06767,430 16,47048,664 30,83614,592 8,208

TotalTennisGolf

966,180$1,075,000

545,280$ 529,720

$640,300420,900

$219,400

$ 80,25083,90079,50022,80017,900

$1,715,300

$ 749,120

$54,183 $26,06767,430 16,47048,664 30,83614,592 8,208

9,000 8,900

All are direct expensesand are assigned based on

experience with accounts written off.

TotalTennisGolf

966,180$1,075,000

545,280$ 529,720

$640,300420,900

$219,400

$ 80,25083,90079,50022,80017,900

$1,715,300

$ 749,120

Deprec. Exp. - delivery equip. 24,000Other operating expenses 350,430

$54,183 $26,06767,430 16,47048,664 30,83614,592 8,208

9,000 8,900

3 trucks1 exclusively for Golf, other two used for both

DEPRECIATION EXPENSE -DELIVERY EQUIPMENT

$ 9,000 $ 0 $ 9,000

Indirect expense allocation:

Depreciation on the one truck thatis exclusively used

for Golf equipment deliveries

DEPRECIATION EXPENSE -DELIVERY EQUIPMENT

$ 9,000 $ 0 $ 9,000

Indirect expense allocation:70% x $15,000 10,500 10,500

30% x $15,000 $ 4,500 4,500

$19,500 $ 4,500 $24,000

The other two trucks are allocatedbased on the dollar amount

of equipment delivered.

TotalTennisGolf

966,180$1,075,000

545,280$ 529,720

$640,300420,900

$219,400

$ 80,25083,90079,50022,80017,900

$1,715,300

$ 749,120

$54,183 $26,06767,430 16,47048,664 30,83614,592 8,208

9,000 8,90019,500 4,500

OTHER OPERATING EXPENSES

$ 84,420 $ 31,980 $116,400

Indirect expense allocation: 159,380 234,030

$243,800 $106,630 $350,430

This broad range of expenses are assignedand allocated using many of the methods

described previously.

74,650

TotalTennisGolf

966,180$1,075,000

545,280$ 529,720

$640,300420,900

$219,400

$ 80,25083,90079,50022,80017,900

$1,715,300

$ 749,120

$54,183 $26,06767,430 16,47048,664 30,83614,592 8,208

9,000 8,90019,500 4,500

243,800 106,630

TotalTennisGolf

966,180$1,075,000

545,280$ 529,720

$640,300420,900

$219,400

$ 80,25083,90079,50022,80017,900

$1,715,300

$ 749,120

$54,183 $26,06767,430 16,47048,664 30,83614,592 8,208

9,000 8,90019,500 4,500

243,800 106,630$ 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.

TotalTennisGolf

966,180$1,075,000

545,280$ 529,720

$640,300420,900

$219,400

$ 80,25083,90079,50022,80017,900

$1,715,300

$ 749,120

$54,183 $26,06767,430 16,47048,664 30,83614,592 8,208

9,000 8,90019,500 4,500

243,800 106,630$ 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

Difference between a department’s gross profit and its direct operating expenses

Indirect expenses are then subtracted from the total direct operating margin to calculated operating incomeIndirect expenses are not allocated to specific

departments

TotalTennisGolf

Net salesCost of goods soldGross profitDirect operating expenses:

Store clerks wages expenseTruck drivers wages expenseAdvertising expense

Total direct operating expenses

Bad debt expense

966,180$1,075,000

545,280$ 529,720

$640,300420,900

$219,400

$ 51,25029,000

17,9009,000

116,400

$1,715,300

$ 749,120

Deprec. expense - delivery equip.Other operating expenses

$ 252,550Dept. direct operating margin

$36,000 $15,25029,000

12,00017,0008,900

9,00084,420 31,980

$ 184,420 $ 68,130$151,270

29,0009,000

$ 345,300 $ 496,570Indirect operating expenses:

Store clerks wages expense $ 29,000

Direct Operating Margin helps usevaluate departmental performance.

TotalTennisGolf

Bad debt expense

966,180$1,075,000

545,280$ 529,720

$640,300420,900

$219,400

$ 51,25029,000

17,9009,000

116,400

$1,715,300

$ 749,120

$36,000 $15,25029,000

12,00017,0008,900

9,00084,420 31,980

$ 184,420 $ 68,130$151,270

29,0009,000

Direct Operating Margin percentageGolf $345,300 ÷ $1,075,000 = 32.1%Tennis $151,270 ÷ $640,300 = 23.6%

Golf is once again better! Is it because of theGross Profit or Operating Expenses or both?

TotalTennisGolf

Bad debt expense

966,180$1,075,000

545,280$ 529,720

$640,300420,900

$219,400

$ 51,25029,000

17,9009,000

116,400

$1,715,300

$ 749,120

$36,000 $15,25029,000

12,00017,0008,900

9,00084,420 31,980

$ 184,420 $ 68,130$151,270

29,0009,000

Direct Operating Expense percentageGolf $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.

TotalTennisGolf

Bad debt expense

966,180$1,075,000

545,280$ 529,720

$640,300420,900

$219,400

$ 51,25029,000

17,9009,000

116,400

$1,715,300

$ 749,120

$36,000 $15,25029,000

12,00017,0008,900

9,00084,420 31,980

$ 184,420 $ 68,130$151,270

29,0009,000

Direct Operating Margin also helps usdetermine the contribution a department

makes to the overall operating incomeof the company.

Truck drivers wages expenseAdvertising expense

Store rent expense

54,90050,500

15,000234,030

$ 406,230

$ 184,420 $ 68,130$151,270

22,800

$ 90,340Total indirect operating exp.

Operating income

Tennis department contributes $151,270to help cover the

indirect operating expenses.

DISCONTINUING A DEPARTMENT

Management must focus on the revenues and expenses that will be eliminated if a department is discontinued.Need to look at the Direct Operating Margin.Indirect expenses are usually for the whole

business and therefore will not be reduced when a department is discontinued.

Net SalesCost of Goods SoldGross MarginDirect Operating ExpensesDept. Direct Oper. MarginIndirect Operating ExpensesOperating income (loss)

Dept A Dept B Dept C

$210,000 $185,000 $170,000

$565,000115,000 110,000 96,000 321,000

$ 95,000 $ 75,000 $ 74,000 $244,00055,000 45,000 54,000 154,000

$ 40,000 $ 30,000 $ 20,000 $ 90,00027,000 22,000 25,000 74,000

$ 13,000 $ 8,000 $ (5,000) $ 16,000

Given the Net Loss, managementis considering discontinuing Dept. C.

Net SalesCost of Goods SoldGross MarginDirect Operating ExpensesDept. Direct Oper. MarginIndirect Operating ExpensesOperating income (loss)

Dept A Dept B Dept C

$210,000 $185,000 $170,000

$565,000115,000 110,000 96,000 321,000

$ 95,000 $ 75,000 $ 74,000 $244,00055,000 45,000 54,000 154,000

$ 40,000 $ 30,000 $ 20,000 $ 90,00027,000 22,000 25,000 74,000

$ 13,000 $ 8,000 $ (5,000) $ 16,000

But Dept. C contributes $20,000to cover the indirect expenses!!!

Without it, profits would be even worse!!

chapter twenty-seven departmental accounting. 4provides separate information about the revenues and...

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