Topic departmental accounts

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TOPIC; DEPARTMENTAL ACCOUNTS
Learning outcomes
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Objectives and advantages of departmental accounting
Basis of allocation of common expenditure among different departments
Methods of departmental accounts
Accounts relating to interdepartmental transfers
Departmental accounts are of great help and assistance to the managements as an information
for controlling the business more intelligently and effectively, since thereby all types of waste
either of material or of money are readily detected; also attention is drawn to inadequacies or
inefficiencies in the working of departments or units into which the business may be divided.
Objectives of Departmental Accounting
•
To know the financial position of each and every department separately, it is helpful to
make a comparison.
•
Calculate commission of the managers department wise.
•
Evaluate performance, planning, and control.
Advantages of Departmental Accounting
•
It is helpful in evaluating the result of each department.
•
It helps to know the profitability of each department.
•
Provide information to Investors and other users for decision making
•
It is helpful in making comparison of each expenses (same department) of the different
accounting years and different expenses (other departments) of the same accounting
year.
BASIS OF ALLOCATION OF COMMON EXPENDITURE AMONG DIFFERENT
DEPARTMENTS
1.
Some expenses, which are specially incurred for a particular department may be charged
directly to the respective department. For example, hiring charges of the transport for
delivery of goods to customer may be charged to the selling and distribution department.
2.
Some of the expenses may be allocated according to their uses. For example, electricity
expenses may be divided according to the sub meter of each department. Following are
the examples of some expenses, which are not directly related to any particular
department may be divide as −
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Cartage Freight Inward Account − may be divided according to purchase of each
department.
•
Depreciation − Depreciation may be divided according to the value of assets employed
in each department.
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•
Repairs and Renewal Charges − Repair and renewal of the assets may be divided
according to the value of the assets used by each department.
•
Managerial Salary − Managerial salary should be divided according to the time spent
by the manager in each department.
•
Building Repair, Rents & Taxes, Building Insurance, etc. − All the expenses related
to the building should be divided according to the floor space occupied by each
department.
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Selling and Distribution Expenses − All the expenses relating to selling and
distribution expenses should be divided according to the sales of each department, such
as freight outward, travelling expenses of sales personals, salary and commission paid to
salesmen, after sales services expenses, discount and bad debts, etc.
•
Insurance of Plant & Machinery − The value of such Plant & Machinery in each
department is the basis of the insurance.
•
Employee/worker Insurance − Charges of a group insurance should be divided
according to the direct wage expenses of each department.
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Power & Fuel − Power & fuel will be allocated according to the working hours and
power of the machine (i.e. Hours worked x Horse power).
METHODS OF DEPARTMENTAL ACCOUNT
There are two methods of keeping Departmental Accounts −
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•
Separate Set of Books for each department
Accounting in Columnar Books form
Separate Set of Books for each Department
Under this method of accounting, each department is treated as a separate unit and separate set
of books are maintained for each unit. Financial results of each unit are combined at the end of
accounting year to know the overall result of the store.
Due to high cost, this method of accounting is followed only by very big business houses or
where to do so is compulsory as per the law. Insurance business is one of the best examples,
where to follow this system is compulsory.
Accounting in Columnar Books Form
Small trading unit generally uses this system of accounting, where accounts of all departments
are maintained together by central accounts department in the columnar books form. Under this
method, sale, purchase, stock, expenses, etc. are maintained in a columnar form.
INTER-DEPARTMENTAL TRANSFERS
An inter-department analysis sheet is prepared at a regular interval such as weekly or monthly
basis to record all the inter-departmental transfers of goods and services. It is necessary, as each
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department is working as a separate profit center. Transfer of the prices of such transactions can
be cost base, market price, or duel basis.
Following Journal entry will pass at the end of that period (weekly or monthly) −
Journal Entry
Receiving Department A/c
To Supplying Department A/c
Dr
Types of Inter-Department Transfer Price
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Cost based transfer price − Where the transfer price is based on standard, actual, or
total cost, or marginal cost is called cost based transfer price.
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Market based transfer price − Where the goods are transferred at selling price from
one department to another is known as market based price. Therefore, unrealized profit
on the goods sold is debited from the selling department in the form of a stock reserve
for both the opening and the closing stock.
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Dual pricing system − Under this system, the goods are transferred on the selling price
by the transferor department and booked at the cost price by the transferee department.
ILLUSTRATION
Please prepare a Departmental Trading and Profit and Loss Account & General Profit and Loss
Account for the year ended 31st December 2018 of ABC Company where department A sells
goods to department B on Normal selling price.
Particulars
Opening stock
Purchases
Inter Transfer of Goods
Wages (relate to trading)
Electricity Expenses
Closing Stock (at cost)
Dept. A
Dept. B
175,000
–
4,025,000
350,000
–
1,225,000
175,000
280,000
17,500
245,000
875,000
315,000
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Sales
4,025,000
2,625,000
35,000
28,000
Office Expenses
Combined Expenses for both Department
Salaries (2:1 Ratio)
472,500
Printing and Stationery Expenses (3:1 Ratio)
157,500
Advertisement Expenses ( Sale Ratio)
1,400,000
Depreciation (1:3 Ratio)
21,000
Required;
1. Departmental trading profit and loss account
2. General profit and loss account
ABC Company
Departmental Trading and Profit and Loss Account
For the year ended 31st December 2018
Particulars
To Opening Stock
To Purchases
Dept. A
175,000
4,025,000
To Transfer from A
To Wages
To Gross Profit c/d
Dept. B
-350,000
1,225,000
175,000
1,750,000
280,000
1,085,000
Particulars
Dept. A
Dept. B
By Sales
4,025,000
2,625,000
By Transfer to
B
1,225,000
—-
875,000
315,000
By
Stock
Closing
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Total
To
Expenses
Electricity
To Office Expenses
To Salaries (2:1 ratio)
6,125,000
2,940,000
Total
6,125,000
2,940,000
17,500
245,000
1,750,000
1,085,000
35,000
28,000
By Gross Profit
b/d
315,000
157,500
118,125
39,375
847,368
552,632
5,250
15,750
411,757
46,743
1,750,000
1,085,000
Total
1,750,000
1,085,000
To Printing &
Stationery (3:1 Ratio)
To Advertisement Exp.
( Sales Ratio 40.25
:26.25)
To Depreciation (1:3
Ratio)
To Net Profit
Total
General Profit and Loss Account
For the year ended 31st December 2018
Particulars
To Stock reserve (Dept. B)
To Net Profit c/d
Dept. A
81,667
376,833
Particulars
Dept. B
By Departmental Net Profit b/d
Dept. A 4 11,757
Dept. B 46,743
————458,500
Total
458,500
Total
458,500
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Illustration
Complex Ltd., has 3 departments, A, B, C. The following information is provided:
A
B
$
$.
Opening Stock
3,000
4,000
Consumption of direct materials
8,000
12,000
C
$.
6,000
−
Wages
Closing Stock
Sales
−
8,000
– 34,000
5,000
4,000
−
10,000
14,000
−
Stock of each department is valued at cost to the department concerned, Stocks of A department
are transferred to B at a margin of 50% above departmental cost, Stocks, of B department are
transferred to C department at a margin of 10% above departmental cost.
Other expenses were:
Rs.
Salaries
2,000
Printing & Stationery
1,000
Rent
6,000
Interest paid
4,000
Depreciation
3,000
Allocate expenses in the ratio of departmental gross profit. Opening figures of reserves for
unrealised profits on departmental stock were:
Department B
Rs. 1,000
Department C
Rs. 2,000
Required; Prepare Departmental Trading and Profit & Loss Accounts for the year ending March
31, 2006.
Solution
Complex Ltd.
Departmental Trading and Profit & Loss Account for year ended 31-3-2006
Dr.
Cr.
A
Rs.
B
Rs.
C
Rs.
Total
A
Rs.
Rs.
To Opening Stock 3,000 4,000 6,000 13,000
By Internal
B
C
Rs.
Rs.
Total
Rs.
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To Direct material
transfer
18,000
–
33,000
51,000
consumption
8,000 12,000 –
20,000
By Sales
To Wages
5,000
15,000
By Closing stock4,000 14,000 8,000 26,000
10,000 –
To Internal transfer
–
18,000 33,000
To Gross Profit c/d
6,000
3,000
To Salaries
3,000
–
–
34,000 34,000
51,000
12,000
22,000 47,000 42,000 1,11,000
22,000 47,000 42,000 1,11,000
1,000
By Gross
500
500
2,000
To Printing &
profit b/d 6,000 3,000 3,000 12,000
Stationery
To Rent
To Depreciation
To Interest paid
To Net Loss b/d
To Reserve for
unrealised profit
on closing stock
500 250 250
3,000 1,500 1,500
1,500 750 750
2,000 1,000 1,000
8,000 4,000 4,000
–
1,000
6,000
3,000
4,000
16,000
4,000
–
3,918
–
–
By Net Loss c/d 2,000 1,000 1,000 4,000
7,918
Working Notes:
Calculation of Unrealised Profit on Closing Stock:
Dept. B: Closing Stock
Cost element transferred from Deptt. A
8,000 4,000 4,000 16,000
By Reserve for
unrealised profit
(on opening
stock)
– – – 3,000
By Balance transferred
to P & L A/c
– – – 4,918
7,918
$ 14,000
$14,000/ 18,000 * 40,000 = Rs. 6,300
Profit added by Deptt. A
$ 6,300× 50/150 = $ 2,100
Clarification: Cost increased during the current period by Deptt. B are Direct Material $
12,000, Wages $ 10,000 and Transfer received from Deptt. A $ 18,000; Total $ 40,000.
So cost element of Deptt. A Rs. 18,000 in closing stock is
18000/40000
(FIFO formula for stock issue is assumed)
Deptt. C: Closing Stock Rs. 8,000.
Profit added by Deptt. B:
Cost element from Deptt. A:
$ 8,000 × 10/110 = Rs. 727
($8,000 -Rs.727)× $18,000 = $ 3,273
Profit added by Deptt. A: $. 3,273× 50/150 = $ 1,091
$1,818
Total Unrealised Profit: $. 2,100 + $ 1,818 = $ 3,918
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