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Departmental Accounting

Departmental Accounting. Chapter 25. Preparing income statements focusing on gross profit by departments. Learning Objective 1. Learning Unit 25-1. Profit Centers. Cost Centers. Learning Unit 25-1. Catlin’s Department Store Income Statement Showing Departmental Gross Profit

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Departmental Accounting

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  1. Departmental Accounting Chapter 25

  2. Preparing income statements focusing on gross profit by departments. Learning Objective 1

  3. Learning Unit 25-1 Profit Centers Cost Centers

  4. Learning Unit 25-1 Catlin’s Department Store Income Statement Showing Departmental Gross Profit Year Ended December 31, 200x Children’sAdultTotal Net Sales $565,500 $275,800 $841,300 Cost of Goods Sold 269,900 197,600 467,500 Gross Profit $295,600 $ 78,200 $373,800 Operating Expenses 170,000 Income Before Taxes $203,800 Income Tax Expense 89,520 Net Income $114,280

  5. Preparing income statements focusing on departmental net income. Learning Objective 2

  6. Learning Unit 25-2 • Direct expenses can be identified and traced to specific departments. • Indirect expenses cannot be specifically traced to departments. • These costs must be apportioned on the basis of square footage or other allocation bases.

  7. Learning Unit 25-2 • What are some examples of direct expenses? • sales salaries • delivery expense • advertising expense

  8. Learning Unit 25-2 • What are some examples of indirect expenses? • building • advertising expense (some may be apportioned) • depreciation • administration

  9. Learning Unit 25-1 Catlin’s Department Store Income Statement Showing Departmental Income Year Ended December 31, 200x Children’sAdultTotal Net Sales $565,500 $275,800 $841,300 Cost of Goods Sold 269,900 197,600 467,500 Gross Profit $295,600 $ 78,200 $373,800 Operating Expenses 114,500 55,500 170,000 Income Before Taxes $181,100 $ 22,700 $203,800 Income Tax Expense 89,520 Net Income $114,280

  10. Learning Unit 25-2 Building Expense $16,000 Adult 10,000 ÷ 40,000 = 25% $16,000 × 25% = $4,000 Children’s 30,000 ÷ 40,000 = 75% $16,000 × 75% = $12,000

  11. Learning Unit 25-2 Delivery Expense $10,000 Adult $10,000 × 40% = $4,000 Children’s $10,000 × 60% = $6,000

  12. Learning Unit 25-2 Advertising Expense $3,000 Adult $3,000 × 1/3 = $1,000 Children’s $3,000 × 2/3 = $2,000

  13. Learning Unit 25-2 Depreciation Expense $30,000 Adult $30,000 × 1/4 = $7,500 Children’s $30,000 × 3/4 = $22,500

  14. Learning Unit 25-2 Administrative Expense $60,000 Adult $60,000 × 1/3 = $20,000 Children’s $60,000 × 2/3 = $40,000

  15. Learning Unit 25-2 Catlin’s Department Store Children’s Adult Direct Indirect Direct Indirect Expenses: Salaries $25,000 $15,000 Building $12,000 $ 4,000 Delivery 6,000 4,000 Advertising 7,000 2,000 4,000 1,000 Depreciation 22,500 7,500 Administration 40,000 20,000 Total $38,000 $76,500 $23,000 $32,500

  16. Preparing income statements focusing on departmental contribution margin. Learning Objective 3

  17. Learning Unit 25-3 • Contribution margin is the amount of revenue available to cover indirect expenses. • Separation of direct costs from indirect costs allows a better view of performance levels of each department.

  18. Learning Unit 25-3 • Cost of goods sold is deducted first with the remaining direct expenses deducted next. • The balance remaining is the contribution margin. • Indirect expenses are deducted last to arrive at the net income figure.

  19. Learning Unit 25-3 • Factors other than just dollar amounts of the contribution margin and net income should be considered before a decision is made to discontinue a department.

  20. Learning Unit 25-2 Catlin’s Department Store Children’s Adult Total Net Sales $565,500 $275,800 $841,300 Cost of Goods Sold 269,900 197,600 467,500 Gross Profit $295,600 $ 78,200 $373,800 Direct Expenses 38,000 23,000 61,000 Contribution Margin $257,600 $ 55,200 $312,800 Indirect Expenses 109,000 Income Before Taxes $203,800 Income Tax Expense 89,520 Net Income $114,280

  21. End of Chapter 25

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