Departmental Accounting

Chapter 25

25 -
 Learning Objective 1

Preparing income statements

focusing on gross profit
by departments.

25 -
 Learning Unit 25-1

Profit
Profit Centers
Centers

Cost
Cost Centers
Centers

25 -
 Learning Unit 25-1
Catlins Department Store
Income Statement Showing Departmental Gross Profit
Year Ended December 31, 200x
Childrens
Childrens Adult
Adult Total
Total
Net
Net Sales
Sales $565,500
$565,500 $275,800
$275,800 $841,300
$841,300
Cost
Cost of
of Goods
Goods Sold
Sold 269,900
269,900 197,600
197,600 467,500
467,500
Gross
Gross Profit
Profit $295,600
$295,600 $$ 78,200
78,200 $373,800
$373,800
Operating
Operating Expenses
Expenses 170,000
170,000
Income
Income Before
BeforeTaxes
Taxes $203,800
$203,800
Income
IncomeTaxTax Expense
Expense 89,520
89,520
Net
Net Income
Income $114,280
$114,280
25 -
 Learning Objective 2

Preparing income statements

focusing on departmental
net income.

25 -
 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 -
 Learning Unit 25-2

What are some examples of direct expenses?

sales salaries
delivery expense
advertising expense

25 -
 Learning Unit 25-2

What are some examples of indirect expenses?

building
advertising expense (some may be apportioned)
depreciation
administration

25 -
 Learning Unit 25-1
Catlins Department Store
Income Statement Showing Departmental Income
Year Ended December 31, 200x
Childrens
Childrens Adult
Adult Total
Total
Net
Net Sales
Sales $565,500
$565,500 $275,800
$275,800 $841,300
$841,300
Cost
Cost of
of Goods
Goods Sold
Sold 269,900
269,900 197,600
197,600 467,500
467,500
Gross
Gross Profit
Profit $295,600
$295,600 $$ 78,200
78,200 $373,800
$373,800
Operating
Operating Expenses
Expenses 114,500
114,500 55,500
55,500 170,000
170,000
Income
Income Before
BeforeTaxes
Taxes $181,100
$181,100 $$ 22,700
22,700 $203,800
$203,800
Income
IncomeTaxTax Expense
Expense 89,520
89,520
Net
Net Income
Income $114,280
$114,280
25 -
 Learning Unit 25-2

Building
Building Expense
Expense $16,000
$16,000

Childrens Adult
30,000 40,000 = 75% 10,000 40,000 = 25%
$16,000 75% = $16,000 25% =
$12,000 $4,000

25 - 1
 Learning Unit 25-2

Delivery
Delivery Expense
Expense $10,000
$10,000

Childrens Adult
$10,000 60% = $10,000 40% =
$6,000 $4,000

25 - 1
 Learning Unit 25-2

Advertising
Advertising Expense
Expense $3,000
$3,000

Childrens Adult
$3,000 2/3 = $3,000 1/3 =
$2,000 $1,000

25 - 1
 Learning Unit 25-2

Depreciation
Depreciation Expense
Expense $30,000
$30,000

Childrens Adult
$30,000 3/4 = $30,000 1/4 =
$22,500 $7,500

25 - 1
 Learning Unit 25-2

Administrative
Administrative Expense
Expense $60,000
$60,000

Childrens Adult
$60,000 2/3 = $60,000 1/3 =
$40,000 $20,000

25 - 1
 Learning Unit 25-2
Catlins Department Store
Childrens
Childrens Adult
Adult
Direct
Direct Indirect
Indirect Direct
Direct Indirect
Indirect
Expenses:
Expenses:
Salaries
Salaries $25,000
$25,000 $15,000
$15,000
Building
Building $12,000
$12,000 $$ 4,000
4,000
Delivery
Delivery 6,000
6,000 4,000
4,000
Advertising
Advertising 7,000
7,000 2,000
2,000 4,000
1,000
4,000
1,000
Depreciation
Depreciation 22,500
22,500 7,500
7,500
Administration
Administration 40,000
40,000 20,000
20,000
Total
Total $38,000
$38,000 $76,500
$76,500 $23,000
$23,000 $32,500
$32,500
25 - 1
 Learning Objective 3

Preparing income statements

focusing on departmental
contribution margin.

25 - 1
 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 - 1
 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 - 1
 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 - 1
 Learning Unit 25-2
Catlins Department Store
Childrens
Childrens Adult
Adult Total
Total
Net
Net Sales
Sales $565,500
$565,500 $275,800
$275,800 $841,300
$841,300
Cost
Cost of
of Goods
Goods Sold
Sold 269,900
269,900 197,600
197,600 467,500
467,500
Gross
Gross Profit
Profit $295,600
$295,600 $$ 78,200
78,200 $373,800
$373,800
Direct
Direct Expenses
Expenses 38,000
38,000 23,000
23,000 61,000
61,000
Contribution
Contribution Margin
Margin $257,600
$257,600 $$ 55,200
55,200 $312,800
$312,800
Indirect
Indirect Expenses
Expenses 109,000
109,000
Income
Income Before
BeforeTaxes
Taxes $203,800
$203,800
Income
IncomeTaxTax Expense
Expense 89,520
89,520
Net
Net Income
Income $114,280
$114,280
25 - 2
End of Chapter 25

25 - 2