CHAPTER TWENTY-SEVEN
DEPARTMENTAL ACCOUNTING
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
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
Gross Profit ÷ Net Sales$529,720 ÷ $1,075,000
49.3%Gross profit percentages
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
Gross Profit ÷ Net Sales$219,400 ÷ $640,300
49.3%Gross profit percentages 34.3%
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
Golf is earning a much biggergross profit percentage than Tennis.
49.3%Gross profit percentages 34.3%
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
This does not mean that Golf ismore profitable overall, we must look
at the departmental operating expenses.
49.3%Gross profit percentages 34.3%
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
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
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 expense
Golf 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
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
$54,183 $26,067
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
$54,183 $26,067
Annie’s has 3 drivers.1 driver delivers only Golf equipment
and 2 drivers deliver both.
TRUCK DRIVERS WAGES EXPENSE
Direct expense
Golf Tennis Total
$29,000 $ 0 $29,000
Salary of the one driver whodelivers only Golf equipment.
TRUCK DRIVERS WAGES EXPENSE
Direct expense
Golf Tennis Total
$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
TRUCK DRIVERS WAGES EXPENSE
Direct expense
Golf Tennis Total
$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
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
$54,183 $26,06767,430 16,470
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
$54,183 $26,06767,430 16,470
Annie’s advertising in both thenewspaper and the radio
ADVERTISING EXPENSE
NEWSPAPER
RADIO
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
RADIO
GOLF TENNIS MIXED
All the radio advertisingis considered “mixed.”
$17,000 $12,000 $16,000
34,500
ADVERTISING EXPENSE
NEWSPAPER
RADIO
GOLF TENNIS MIXED
$17,000 $12,000 $16,000
34,500$17,000 $12,000 $50,500
ADVERTISING EXPENSE
Direct expense
Golf Tennis Total
$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
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
$54,183 $26,06767,430 16,47048,664 30,836
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
$54,183 $26,06767,430 16,47048,664 30,836
Next we will split the rent.
STORE RENT EXPENSE
Direct expense
Golf Tennis Total
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
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
$54,183 $26,06767,430 16,47048,664 30,83614,592 8,208
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
$54,183 $26,06767,430 16,47048,664 30,83614,592 8,2089,000 8,900
All are direct expensesand are assigned based on
experience with accounts written off.
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. Exp. - delivery equip. 24,000Other operating expenses 350,430
$ 658,780Total operating expensesOperating income $ 90,340
$54,183 $26,06767,430 16,47048,664 30,83614,592 8,2089,000 8,900
3 trucks1 exclusively for Golf, other two used for both
DEPRECIATION EXPENSE -DELIVERY EQUIPMENT
Direct expense
Golf Tennis Total
$ 9,000 $ 0 $ 9,000
Indirect expense allocation:
Depreciation on the one truck thatis exclusively used
for Golf equipment deliveries
DEPRECIATION EXPENSE -DELIVERY EQUIPMENT
Direct expense
Golf Tennis Total
$ 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
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
$54,183 $26,06767,430 16,47048,664 30,83614,592 8,2089,000 8,900
19,500 4,500
OTHER OPERATING EXPENSES
Direct expense
Golf Tennis Total
$ 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
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
$54,183 $26,06767,430 16,47048,664 30,83614,592 8,2089,000 8,900
19,500 4,500243,800 106,630
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
$54,183 $26,06767,430 16,47048,664 30,83614,592 8,2089,000 8,900
19,500 4,500243,800 106,630
$ 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
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
$54,183 $26,06767,430 16,47048,664 30,83614,592 8,2089,000 8,900
19,500 4,500243,800 106,630
$ 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
Annie’s Sporting GoodsIncome Statement
For Years Ended December 31, 20--
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
Annie’s Sporting GoodsIncome Statement
For Years Ended December 31, 20--
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 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
Annie’s Sporting GoodsIncome Statement
For Years Ended December 31, 20--
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 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
Annie’s Sporting GoodsIncome Statement
For Years Ended December 31, 20--
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 also helps usdetermine the contribution a department
makes to the overall operating incomeof the company.
Truck drivers wages expenseAdvertising expense
Total direct operating expenses
Store rent expense
54,90050,500
15,000234,030
Deprec. expense - delivery equip.Other operating expenses
$ 252,550Dept. direct operating margin
$ 406,230
$ 184,420 $ 68,130$151,270
22,800
$ 345,300 $ 496,570Indirect operating expenses:
Store clerks wages expense $ 29,000
$ 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.
DISCONTINUING A DEPARTMENT
Net SalesCost of Goods SoldGross MarginDirect Operating Expenses
Dept. Direct Oper. Margin
Indirect Operating ExpensesOperating income (loss)
Dept A Dept B Dept C
$210,000 $185,000 $170,000
Total
$565,000
115,000 110,000 96,000 321,000$ 95,000 $ 75,000 $ 74,000 $244,000
55,000 45,000 54,000 154,000
$ 40,000 $ 30,000 $ 20,000 $ 90,000
27,000 22,000 25,000 74,000$ 13,000 $ 8,000 $ (5,000) $ 16,000
Given the Net Loss, managementis considering discontinuing Dept. C.
DISCONTINUING A DEPARTMENT
Net SalesCost of Goods SoldGross MarginDirect Operating Expenses
Dept. Direct Oper. Margin
Indirect Operating ExpensesOperating income (loss)
Dept A Dept B Dept C
$210,000 $185,000 $170,000
Total
$565,000
115,000 110,000 96,000 321,000$ 95,000 $ 75,000 $ 74,000 $244,000
55,000 45,000 54,000 154,000
$ 40,000 $ 30,000 $ 20,000 $ 90,000
27,000 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!!