Departmental Income Statements

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Departmental Income Statements
Principles of Accounting
Help Lesson 7
By Laurie L. Swanson
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Departmental Accounting

• Companies can be divided into departments for
  more effective management and control.

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Departmental Accounting

• This presentation provides a simplified
  discussion of departmental accounting and
  departmental income statements.

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Departmental Accounting

• You are probably familiar with some of the
  departments of discount retail superstores such
  as clothing, groceries, electronics, auto
  supplies, and the list continues.
• Departments also include the accounting
  department, purchasing, administration, human
  resources, and the list goes on.

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Broad Classifications of Departments

• Operating Departments Perform an organizations
  main functions
• Production
• Selling
• Service Departments Provide support to
  operating departments
• Payroll
• Human Resources
• Accounting

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Departmental Accounting

• The purpose of departmental accounting is to
  provide management with information used to
  evaluate the profitability or cost effectiveness
  of each department as well as to help set up
  responsibility centers to assign costs to
  department managers.

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Departmental Accounting
Reports for departmental accounting may vary by
company and management needs, but one important
tool is the Departmental Income Statement. To
see the importance of the information provided by
a Departmental Income Statement, look at the
example for Doing Fine Company.
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Doing Fine Company

• Doing Fine is a retail business with three
  operating departments
• Clothing
• Housewares
• Electronics

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Upon looking at the Income Statement for Doing
Fine, you might say that the company is in good
shape.
Doing Fine Doing Fine Doing Fine Doing Fine Doing Fine
Income Statement Income Statement Income Statement Income Statement Income Statement
For Year Ended December 31, 2005 For Year Ended December 31, 2005 For Year Ended December 31, 2005 For Year Ended December 31, 2005 For Year Ended December 31, 2005
Sales 3,000,000
Cost of Goods Sold 1,000,000
Gross Profit 2,000,000
Expenses
Wages Expense 400,000
Utilities Expense 200,000
Supplies Expense 100,000
Total Expenses 700,000
Net Income 1,300,000

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Departmental Accounting
Are there any areas that require attention at
Doing Fine?
To determine the answer to that question, take a
look at the Departmental Income Statement for
Doing Fine.
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Doing Fine Doing Fine Doing Fine Doing Fine Doing Fine
Departmental Income Statement Departmental Income Statement Departmental Income Statement Departmental Income Statement Departmental Income Statement
For Year Ended December 31, 2005 For Year Ended December 31, 2005 For Year Ended December 31, 2005 For Year Ended December 31, 2005 For Year Ended December 31, 2005
               
  Clothing Housewares Electronics Combined
Sales 1,500,000 500,000 1,000,000 3,000,000
Cost of Goods Sold 250,000 300,000 450,000 1,000,000
Gross Profit 1,250,000 200,000 550,000 2,000,000
Expenses
Wages Expense 150,000 150,000 100,000 400,000
Utilities Expense 100,000 75,000 25,000 200,000
Supplies Expense 75,000 10,000 15,000 100,000
Total Expenses 325,000 235,000 140,000 700,000
Net Income (Loss) 925,000 (35,000) 410,000 1,300,000
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Management Information Provided by the
Departmental Income Statement
While Doing Fine is making a profit overall, the
Housewares Department has a net loss. This
points out an area that management needs to look
into to see what, if any, changes need to be made
in this department.
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E 21-4 - Expanded

• See Exercise 21-4 on page 885-886.
• Prepare Cost Allocation Schedules as instructed
• Construct a Departmental Income Statement using
  the additional information on the next slide as
  well as information found in the Exercise data
  and from the cost allocation schedules.

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E 21-4 - ExpandedAdditional Information
Cycles Clothing
Cost of Goods Sold 56,250 18,750
Salaries Expense 22,000 16,000
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E 21-4 - ExpandedIncome Statement Solution
Cycles Clothing Combined
Sales 228,000 72,000 300,000
Less Cost of Goods Sold 86,000 7,000 93,000
Gross Profit 142,000 65,000 207,000
Expenses
Salaries Expense 16,000 5,000 21,000
Utilities Expense 29,900 19,500 49,400
Administrative Expense 16,834 5,316 22,150
Advertising Expense 21,204 8,246 29,450
Total Expenses 75,938 37,062 122,000
Net Income (Loss) 66,062 27,938 85,000
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End of Lesson On Departmental Income Statements