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Departmental Accounting

Chapter 24. Departmental Accounting. Learning Objective 1. Preparing income statements focusing on gross profit by department. LO-1. Profit Center. Unit or department that incurs costs and generates revenues Exists for the purpose of making money for a business. LO-1. Cost Center.

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Departmental Accounting

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  1. 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 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 DirectIndirect 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 9,250 Less discounts 250 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 8,450 Less discounts 450 Cost of goods available for sale 9,500 Less ending inventory 2,500 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

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