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CHAPTER TWENTY-SEVEN

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CHAPTER TWENTY-SEVEN DEPARTMENTAL ACCOUNTING DEPARTMENTAL ACCOUNTING Provides separate information about the revenues and expenses of each department Useful to ... – PowerPoint PPT presentation

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Title: CHAPTER TWENTY-SEVEN


1
CHAPTER TWENTY-SEVEN
  • DEPARTMENTAL ACCOUNTING

2
DEPARTMENTAL ACCOUNTING
  • Provides separate information about the revenues
    and expenses of each department
  • Useful to management for three purposes
  • Planning
  • Control
  • Performance evaluation
  • Generally for internal financial statement users
  • Often only the income statement is prepared

3
Annies Sporting Goods
Income Statement
For Years Ended December 31, 20--
Tennis
Total
Golf
Net sales
1,075,000
640,300
1,715,300
Cost of goods sold
966,180
545,280
420,900
Gross profit
529,720
219,400
749,120
Operating expenses
Store clerks wages expense
80,250
Sales, Cost of Goods Sold and Gross Profit are
reported separately for each department.
Truck drivers wages expense
83,900
Advertising expense
79,500
Store rent expense
22,800
Bad debt expense
17,900
Deprec. expense - delivery equip.
24,000
Other operating expenses
350,430
658,780
Total operating expenses
Operating income
90,340
4
Annies Sporting Goods
Income Statement
For Years Ended December 31, 20--
Tennis
Total
Golf
Net sales
1,075,000
640,300
1,715,300
Cost of goods sold
966,180
545,280
420,900
Gross profit
529,720
219,400
749,120
49.3
Gross profit percentages
Operating expenses
Store clerks wages expense
80,250
Gross Profit Net Sales 529,720 1,075,000
Truck drivers wages expense
83,900
Advertising expense
79,500
Store rent expense
22,800
Bad debt expense
17,900
Deprec. expense - delivery equip.
24,000
Other operating expenses
350,430
658,780
Total operating expenses
Operating income
90,340
5
Annies Sporting Goods
Income Statement
For Years Ended December 31, 20--
Tennis
Total
Golf
Net sales
1,075,000
640,300
1,715,300
Cost of goods sold
966,180
545,280
420,900
Gross profit
529,720
219,400
749,120
49.3
Gross profit percentages
34.3
Operating expenses
Store clerks wages expense
80,250
Gross Profit Net Sales 219,400 640,300
Truck drivers wages expense
83,900
Advertising expense
79,500
Store rent expense
22,800
Bad debt expense
17,900
Deprec. expense - delivery equip.
24,000
Other operating expenses
350,430
658,780
Total operating expenses
Operating income
90,340
6
Annies Sporting Goods
Income Statement
For Years Ended December 31, 20--
Tennis
Total
Golf
Net sales
1,075,000
640,300
1,715,300
Cost of goods sold
966,180
545,280
420,900
Gross profit
529,720
219,400
749,120
49.3
Gross profit percentages
34.3
Operating expenses
Store clerks wages expense
80,250
Golf is earning a much bigger gross profit
percentage than Tennis.
Truck drivers wages expense
83,900
Advertising expense
79,500
Store rent expense
22,800
Bad debt expense
17,900
Deprec. expense - delivery equip.
24,000
Other operating expenses
350,430
658,780
Total operating expenses
Operating income
90,340
7
Annies Sporting Goods
Income Statement
For Years Ended December 31, 20--
Tennis
Total
Golf
Net sales
1,075,000
640,300
1,715,300
Cost of goods sold
966,180
545,280
420,900
Gross profit
529,720
219,400
749,120
49.3
Gross profit percentages
34.3
Operating expenses
Store clerks wages expense
80,250
This does not mean that Golf is more profitable
overall, we must look at the departmental
operating expenses.
Truck drivers wages expense
83,900
Advertising expense
79,500
Store rent expense
22,800
Bad debt expense
17,900
Deprec. expense - delivery equip.
24,000
Other operating expenses
350,430
658,780
Total operating expenses
Operating income
90,340
8
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

9
Annies Sporting Goods
Income Statement
For Years Ended December 31, 20--
Tennis
Total
Golf
Net sales
1,075,000
640,300
1,715,300
Cost of goods sold
966,180
545,280
420,900
Gross profit
529,720
219,400
749,120
Operating expenses
Store clerks wages expense
80,250
Truck drivers wages expense
83,900
Advertising expense
79,500
Annies employs five store clerks. Two work in
the Golf department, one in the Tennis department
and two assist customers in Both departments.
Store rent expense
22,800
Bad debt expense
17,900
Deprec. expense - delivery equip.
24,000
Other operating expenses
350,430
658,780
Total operating expenses
Operating income
90,340
10
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 be allocated
between Golf and Tennis.
11
STORE CLERK WAGES EXPENSE
Golf
Tennis
Sales
1,075,000
640,300
Total Sales
1,715,300
1,715,300
62.7
37.3
Allocation is made based on percentage of total
sales.
12
STORE CLERKS WAGES EXPENSE
Golf
Tennis
Total
Direct expense
15,250
51,250
36,000
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
13
Annies Sporting Goods
Income Statement
For Years Ended December 31, 20--
Tennis
Total
Golf
Net sales
1,075,000
640,300
1,715,300
Cost of goods sold
966,180
545,280
420,900
Gross profit
529,720
219,400
749,120
Operating expenses
Store clerks wages expense
80,250
54,183
26,067
Truck drivers wages expense
83,900
Advertising expense
79,500
Store rent expense
22,800
Bad debt expense
17,900
Deprec. expense - delivery equip.
24,000
Other operating expenses
350,430
658,780
Total operating expenses
Operating income
90,340
14
Annies Sporting Goods
Income Statement
For Years Ended December 31, 20--
Tennis
Total
Golf
Net sales
1,075,000
640,300
1,715,300
Cost of goods sold
966,180
545,280
420,900
Gross profit
529,720
219,400
749,120
Operating expenses
Store clerks wages expense
80,250
54,183
26,067
Truck drivers wages expense
83,900
Advertising expense
79,500
Store rent expense
22,800
Annies has 3 drivers. 1 driver delivers only
Golf equipment and 2 drivers deliver both.
Bad debt expense
17,900
Deprec. expense - delivery equip.
24,000
Other operating expenses
350,430
658,780
Total operating expenses
Operating income
90,340
15
TRUCK DRIVERS WAGES EXPENSE
Golf
Tennis
Total
Direct expense
0
29,000
29,000
Salary of the one driver who delivers only Golf
equipment.
16
TRUCK DRIVERS WAGES EXPENSE
Golf
Tennis
Total
Direct expense
0
29,000
29,000
Indirect expense allocation
70 x
54,900
30 x
54,900
The two other drivers are allocated based on the
dollar amount of the Golf and Tennis equipment
delivered.
17
TRUCK DRIVERS WAGES EXPENSE
Golf
Tennis
Total
Direct expense
0
29,000
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
18
Annies Sporting Goods
Income Statement
For Years Ended December 31, 20--
Tennis
Total
Golf
Net sales
1,075,000
640,300
1,715,300
Cost of goods sold
966,180
545,280
420,900
Gross profit
529,720
219,400
749,120
Operating expenses
Store clerks wages expense
80,250
54,183
26,067
Truck drivers wages expense
83,900
67,430
16,470
Advertising expense
79,500
Store rent expense
22,800
Bad debt expense
17,900
Deprec. expense - delivery equip.
24,000
Other operating expenses
350,430
658,780
Total operating expenses
Operating income
90,340
19
Annies Sporting Goods
Income Statement
For Years Ended December 31, 20--
Tennis
Total
Golf
Net sales
1,075,000
640,300
1,715,300
Cost of goods sold
966,180
545,280
420,900
Gross profit
529,720
219,400
749,120
Operating expenses
Store clerks wages expense
80,250
54,183
26,067
Truck drivers wages expense
83,900
67,430
16,470
Advertising expense
79,500
Store rent expense
22,800
Annies advertising in both the newspaper and the
radio
Bad debt expense
17,900
Deprec. expense - delivery equip.
24,000
Other operating expenses
350,430
658,780
Total operating expenses
Operating income
90,340
20
ADVERTISING EXPENSE
GOLF
TENNIS
MIXED
17,000
12,000
16,000
NEWSPAPER
RADIO
Annies newspaper advertising is based on the
number of inches of copy space.
21
ADVERTISING EXPENSE
GOLF
TENNIS
MIXED
17,000
12,000
16,000
NEWSPAPER
34,500
RADIO
All the radio advertising is considered mixed.
22
ADVERTISING EXPENSE
GOLF
TENNIS
MIXED
17,000
12,000
16,000
NEWSPAPER
34,500
RADIO
17,000
12,000
50,500
23
ADVERTISING EXPENSE
Golf
Tennis
Total
Direct expense
12,000
29,000
17,000
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 allocated based on the
percentage of total sales.
24
Annies Sporting Goods
Income Statement
For Years Ended December 31, 20--
Tennis
Total
Golf
Net sales
1,075,000
640,300
1,715,300
Cost of goods sold
966,180
545,280
420,900
Gross profit
529,720
219,400
749,120
Operating expenses
Store clerks wages expense
80,250
54,183
26,067
Truck drivers wages expense
83,900
67,430
16,470
Advertising expense
79,500
48,664
30,836
Store rent expense
22,800
Bad debt expense
17,900
Deprec. expense - delivery equip.
24,000
Other operating expenses
350,430
658,780
Total operating expenses
Operating income
90,340
25
Annies Sporting Goods
Income Statement
For Years Ended December 31, 20--
Tennis
Total
Golf
Net sales
1,075,000
640,300
1,715,300
Cost of goods sold
966,180
545,280
420,900
Gross profit
529,720
219,400
749,120
Operating expenses
Store clerks wages expense
80,250
54,183
26,067
Truck drivers wages expense
83,900
67,430
16,470
Advertising expense
79,500
48,664
30,836
Store rent expense
22,800
Bad debt expense
17,900
Next we will split the rent.
Deprec. expense - delivery equip.
24,000
Other operating expenses
350,430
658,780
Total operating expenses
Operating income
90,340
26
STORE RENT EXPENSE
Golf
Tennis
Total
Direct 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 considered indirect (mixed)
and will be allocated based on square foot of
floor space.
27
Annies Sporting Goods
Income Statement
For Years Ended December 31, 20--
Tennis
Total
Golf
Net sales
1,075,000
640,300
1,715,300
Cost of goods sold
966,180
545,280
420,900
Gross profit
529,720
219,400
749,120
Operating expenses
Store clerks wages expense
80,250
54,183
26,067
Truck drivers wages expense
83,900
67,430
16,470
Advertising expense
79,500
48,664
30,836
Store rent expense
22,800
14,592
8,208
Bad debt expense
17,900
Deprec. expense - delivery equip.
24,000
Other operating expenses
350,430
658,780
Total operating expenses
Operating income
90,340
28
Annies Sporting Goods
Income Statement
For Years Ended December 31, 20--
Tennis
Total
Golf
Net sales
1,075,000
640,300
1,715,300
Cost of goods sold
966,180
545,280
420,900
Gross profit
529,720
219,400
749,120
Operating expenses
Store clerks wages expense
80,250
54,183
26,067
Truck drivers wages expense
83,900
67,430
16,470
Advertising expense
79,500
48,664
30,836
Store rent expense
22,800
14,592
8,208
Bad debt expense
17,900
9,000
8,900
Deprec. expense - delivery equip.
24,000
All are direct expenses and are assigned based
on experience with accounts written off.
Other operating expenses
350,430
658,780
Total operating expenses
Operating income
90,340
29
Annies Sporting Goods
Income Statement
For Years Ended December 31, 20--
Tennis
Total
Golf
Net sales
1,075,000
640,300
1,715,300
Cost of goods sold
966,180
545,280
420,900
Gross profit
529,720
219,400
749,120
Operating expenses
Store clerks wages expense
80,250
54,183
26,067
Truck drivers wages expense
83,900
67,430
16,470
Advertising expense
79,500
48,664
30,836
Store rent expense
22,800
14,592
8,208
Bad debt expense
17,900
9,000
8,900
Deprec. Exp. - delivery equip.
24,000
Other operating expenses
350,430
3 trucks 1 exclusively for Golf, other two used
for both
658,780
Total operating expenses
Operating income
90,340
30
DEPRECIATION EXPENSE -DELIVERY EQUIPMENT
Golf
Tennis
Total
Direct expense
0
9,000
9,000
Indirect expense allocation
Depreciation on the one truck that is exclusively
used for Golf equipment deliveries
31
DEPRECIATION EXPENSE -DELIVERY EQUIPMENT
Golf
Tennis
Total
Direct expense
0
9,000
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 allocated based on the
dollar amount of equipment delivered.
32
Annies Sporting Goods
Income Statement
For Years Ended December 31, 20--
Tennis
Total
Golf
Net sales
1,075,000
640,300
1,715,300
Cost of goods sold
966,180
545,280
420,900
Gross profit
529,720
219,400
749,120
Operating expenses
Store clerks wages expense
80,250
54,183
26,067
Truck drivers wages expense
83,900
67,430
16,470
Advertising expense
79,500
48,664
30,836
Store rent expense
22,800
14,592
8,208
Bad debt expense
17,900
9,000
8,900
Deprec. expense - delivery equip.
24,000
19,500
4,500
Other operating expenses
350,430
658,780
Total operating expenses
Operating income
90,340
33
OTHER OPERATING EXPENSES
Golf
Tennis
Total
Direct expense
31,980
116,400
84,420
Indirect expense allocation
159,380
234,030
74,650
243,800
106,630
350,430
This broad range of expenses are assigned and
allocated using many of the methods described
previously.
34
Annies Sporting Goods
Income Statement
For Years Ended December 31, 20--
Tennis
Total
Golf
Net sales
1,075,000
640,300
1,715,300
Cost of goods sold
966,180
545,280
420,900
Gross profit
529,720
219,400
749,120
Operating expenses
Store clerks wages expense
80,250
54,183
26,067
Truck drivers wages expense
83,900
67,430
16,470
Advertising expense
79,500
48,664
30,836
Store rent expense
22,800
14,592
8,208
Bad debt expense
17,900
9,000
8,900
Deprec. expense - delivery equip.
24,000
19,500
4,500
Other operating expenses
350,430
243,800
106,630
658,780
Total operating expenses
Operating income
90,340
35
Annies Sporting Goods
Income Statement
For Years Ended December 31, 20--
Tennis
Total
Golf
Net sales
1,075,000
640,300
1,715,300
Cost of goods sold
966,180
545,280
420,900
Gross profit
529,720
219,400
749,120
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.
Operating expenses
Store clerks wages expense
80,250
54,183
26,067
Truck drivers wages expense
83,900
67,430
16,470
Advertising expense
79,500
48,664
30,836
Store rent expense
22,800
14,592
8,208
Bad debt expense
17,900
9,000
8,900
Deprec. expense - delivery equip.
24,000
19,500
4,500
Other operating expenses
350,430
243,800
106,630
658,780
Total operating expenses
457,169
201,611
Operating income
90,340
72,551
17,789
36
Annies Sporting Goods
Income Statement
For Years Ended December 31, 20--
Tennis
Total
Golf
Net sales
1,075,000
640,300
1,715,300
Cost of goods sold
966,180
545,280
420,900
Gross profit
529,720
219,400
749,120
Operating Expense Percentages Golf 457,169
1,075,000 42.5 Tennis 201,611 640,300
31.5
Operating expenses
Store clerks wages expense
80,250
54,183
26,067
Truck drivers wages expense
83,900
67,430
16,470
Advertising expense
79,500
48,664
30,836
Store rent expense
22,800
14,592
8,208
Bad debt expense
17,900
9,000
8,900
Deprec. expense - delivery equip.
24,000
19,500
4,500
Other operating expenses
350,430
243,800
106,630
658,780
Total operating expenses
457,169
201,611
Operating income
90,340
72,551
17,789
37
DIRECT OPERATING MARGIN
  • Difference between a departments gross profit
    and its direct operating expenses
  • Indirect expenses are then subtracted from the
    total direct operating margin to calculated
    operating income
  • Indirect expenses are not allocated to specific
    departments

38
Annies Sporting Goods
Income Statement
For Years Ended December 31, 20--
Tennis
Total
Golf
Net sales
1,075,000
640,300
1,715,300
Cost of goods sold
966,180
545,280
420,900
Gross profit
529,720
219,400
749,120
Direct operating expenses
Store clerks wages expense
51,250
36,000
15,250
Direct Operating Margin helps us evaluate
departmental performance.
Truck drivers wages expense
29,000
29,000
Advertising expense
12,000
17,000
29,000
Bad debt expense
17,900
8,900
9,000
9,000
Deprec. expense - delivery equip.
9,000
116,400
Other operating expenses
84,420
31,980
Total direct operating expenses
252,550
184,420
68,130
Dept. direct operating margin
151,270
345,300
496,570
Indirect operating expenses
Store clerks wages expense
29,000
39
Annies Sporting Goods
Income Statement
For Years Ended December 31, 20--
Tennis
Total
Golf
Net sales
1,075,000
640,300
1,715,300
Cost of goods sold
966,180
545,280
420,900
Gross profit
529,720
219,400
749,120
Direct Operating Margin percentage Golf 345,300
1,075,000 32.1 Tennis 151,270 640,300
23.6 Golf is once again better! Is it because of
the Gross Profit or Operating Expenses or both?
Direct operating expenses
Store clerks wages expense
51,250
36,000
15,250
Truck drivers wages expense
29,000
29,000
Advertising expense
12,000
17,000
29,000
Bad debt expense
17,900
8,900
9,000
9,000
Deprec. expense - delivery equip.
9,000
116,400
Other operating expenses
84,420
31,980
Total direct operating expenses
252,550
184,420
68,130
Dept. direct operating margin
151,270
345,300
496,570
Indirect operating expenses
Store clerks wages expense
29,000
40
Annies Sporting Goods
Income Statement
For Years Ended December 31, 20--
Tennis
Total
Golf
Net sales
1,075,000
640,300
1,715,300
Direct Operating Expense percentage Golf 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
Golfs better Gross Profit, Golf still ended with
a better Direct Operating Margin.
Cost of goods sold
966,180
545,280
420,900
Gross profit
529,720
219,400
749,120
Direct operating expenses
Store clerks wages expense
51,250
36,000
15,250
Truck drivers wages expense
29,000
29,000
Advertising expense
12,000
17,000
29,000
Bad debt expense
17,900
8,900
9,000
9,000
Deprec. expense - delivery equip.
9,000
116,400
Other operating expenses
84,420
31,980
Total direct operating expenses
252,550
184,420
68,130
Dept. direct operating margin
151,270
345,300
496,570
Indirect operating expenses
Store clerks wages expense
29,000
41
Annies Sporting Goods
Income Statement
For Years Ended December 31, 20--
Tennis
Total
Golf
Net sales
1,075,000
640,300
1,715,300
Cost of goods sold
966,180
545,280
420,900
Gross profit
529,720
219,400
749,120
Direct operating expenses
Direct Operating Margin also helps us determine
the contribution a department makes to the
overall operating income of the company.
Store clerks wages expense
51,250
36,000
15,250
Truck drivers wages expense
29,000
29,000
Advertising expense
12,000
17,000
29,000
Bad debt expense
17,900
8,900
9,000
9,000
Deprec. expense - delivery equip.
9,000
116,400
Other operating expenses
84,420
31,980
Total direct operating expenses
252,550
184,420
68,130
Dept. direct operating margin
151,270
345,300
496,570
Indirect operating expenses
Store clerks wages expense
29,000
42
252,550
68,130
Total direct operating expenses
184,420
Dept. direct operating margin
151,270
345,300
496,570
Indirect operating expenses
Store clerks wages expense
29,000
Truck drivers wages expense
54,900
Advertising expense
50,500
Store rent expense
22,800
15,000
Deprec. expense - delivery equip.
234,030
Other operating expenses
406,230
Total indirect operating exp.
90,340
Operating income
Tennis department contributes 151,270 to help
cover the indirect operating expenses.
43
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.

44
DISCONTINUING A DEPARTMENT
Dept A
Dept B
Dept C
Total
210,000
185,000
170,000
565,000
Net Sales
Cost of Goods Sold
115,000
110,000
96,000
321,000
Gross Margin
95,000
75,000
74,000
244,000
Direct Operating Expenses
55,000
45,000
54,000
154,000
Dept. Direct Oper. Margin
40,000
30,000
20,000
90,000
Indirect Operating Expenses
27,000
22,000
25,000
74,000
Operating income (loss)
13,000
8,000
(5,000)
16,000
Given the Net Loss, management is considering
discontinuing Dept. C.
45
DISCONTINUING A DEPARTMENT
Dept A
Dept B
Dept C
Total
210,000
185,000
170,000
565,000
Net Sales
Cost of Goods Sold
115,000
110,000
96,000
321,000
Gross Margin
95,000
75,000
74,000
244,000
Direct Operating Expenses
55,000
45,000
54,000
154,000
Dept. Direct Oper. Margin
40,000
30,000
20,000
90,000
Indirect Operating Expenses
27,000
22,000
25,000
74,000
Operating income (loss)
13,000
8,000
(5,000)
16,000
But Dept. C contributes 20,000 to cover the
indirect expenses!!! Without it, profits would be
even worse!!
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