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CHAPTER TWENTY-SEVEN

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 Control Performance evaluation Generally for internal financial statement users

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CHAPTER TWENTY-SEVEN

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  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. Annie’s 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 545,280 420,900 966,180 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 Total operating expenses $ 658,780 Operating income $ 90,340

  4. Annie’s 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 545,280 420,900 966,180 Gross profit $ 529,720 $219,400 $ 749,120 Gross profit percentages 49.3% 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 Total operating expenses $ 658,780 Operating income $ 90,340

  5. Annie’s 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 545,280 420,900 966,180 Gross profit $ 529,720 $219,400 $ 749,120 Gross profit percentages 49.3% 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 Total operating expenses $ 658,780 Operating income $ 90,340

  6. Annie’s 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 545,280 420,900 966,180 Gross profit $ 529,720 $219,400 $ 749,120 Gross profit percentages 49.3% 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 Total operating expenses $ 658,780 Operating income $ 90,340

  7. Annie’s 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 545,280 420,900 966,180 Gross profit $ 529,720 $219,400 $ 749,120 Gross profit percentages 49.3% 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 Total operating expenses $ 658,780 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. Annie’s 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 545,280 420,900 966,180 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 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 rent expense 22,800 Bad debt expense 17,900 Deprec. expense - delivery equip. 24,000 Other operating expenses 350,430 Total operating expenses $ 658,780 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. Annie’s 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 545,280 420,900 966,180 Gross profit $ 529,720 $219,400 $ 749,120 Operating expenses: Store clerks wages expense $54,183 $26,067 $ 80,250 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 Total operating expenses $ 658,780 Operating income $ 90,340

  14. Annie’s 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 545,280 420,900 966,180 Gross profit $ 529,720 $219,400 $ 749,120 Operating expenses: Store clerks wages expense $54,183 $26,067 $ 80,250 Truck drivers wages expense 83,900 Advertising expense 79,500 Store rent expense 22,800 Annie’s 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 Total operating expenses $ 658,780 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. Annie’s 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 545,280 420,900 966,180 Gross profit $ 529,720 $219,400 $ 749,120 Operating expenses: Store clerks wages expense $54,183 $26,067 $ 80,250 Truck drivers wages expense 67,430 16,470 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 Total operating expenses $ 658,780 Operating income $ 90,340

  19. Annie’s 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 545,280 420,900 966,180 Gross profit $ 529,720 $219,400 $ 749,120 Operating expenses: Store clerks wages expense $54,183 $26,067 $ 80,250 Truck drivers wages expense 67,430 16,470 83,900 Advertising expense 79,500 Store rent expense 22,800 Annie’s advertising in both the newspaper and the radio Bad debt expense 17,900 Deprec. expense - delivery equip. 24,000 Other operating expenses 350,430 Total operating expenses $ 658,780 Operating income $ 90,340

  20. ADVERTISING EXPENSE GOLF TENNIS MIXED $17,000 $12,000 $16,000 NEWSPAPER RADIO Annie’s 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. Annie’s 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 545,280 420,900 966,180 Gross profit $ 529,720 $219,400 $ 749,120 Operating expenses: Store clerks wages expense $54,183 $26,067 $ 80,250 Truck drivers wages expense 67,430 16,470 83,900 Advertising expense 48,664 30,836 79,500 Store rent expense 22,800 Bad debt expense 17,900 Deprec. expense - delivery equip. 24,000 Other operating expenses 350,430 Total operating expenses $ 658,780 Operating income $ 90,340

  25. Annie’s 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 545,280 420,900 966,180 Gross profit $ 529,720 $219,400 $ 749,120 Operating expenses: Store clerks wages expense $54,183 $26,067 $ 80,250 Truck drivers wages expense 67,430 16,470 83,900 Advertising expense 48,664 30,836 79,500 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 Total operating expenses $ 658,780 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. Annie’s 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 545,280 420,900 966,180 Gross profit $ 529,720 $219,400 $ 749,120 Operating expenses: Store clerks wages expense $54,183 $26,067 $ 80,250 Truck drivers wages expense 67,430 16,470 83,900 Advertising expense 48,664 30,836 79,500 Store rent expense 14,592 8,208 22,800 Bad debt expense 17,900 Deprec. expense - delivery equip. 24,000 Other operating expenses 350,430 Total operating expenses $ 658,780 Operating income $ 90,340

  28. Annie’s 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 545,280 420,900 966,180 Gross profit $ 529,720 $219,400 $ 749,120 Operating expenses: Store clerks wages expense $54,183 $26,067 $ 80,250 Truck drivers wages expense 67,430 16,470 83,900 Advertising expense 48,664 30,836 79,500 Store rent expense 14,592 8,208 22,800 Bad debt expense 9,000 8,900 17,900 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 Total operating expenses $ 658,780 Operating income $ 90,340

  29. Annie’s 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 545,280 420,900 966,180 Gross profit $ 529,720 $219,400 $ 749,120 Operating expenses: Store clerks wages expense $54,183 $26,067 $ 80,250 Truck drivers wages expense 67,430 16,470 83,900 Advertising expense 48,664 30,836 79,500 Store rent expense 14,592 8,208 22,800 Bad debt expense 9,000 8,900 17,900 Deprec. Exp. - delivery equip. 24,000 Other operating expenses 350,430 3 trucks 1 exclusively for Golf, other two used for both Total operating expenses $ 658,780 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. Annie’s 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 545,280 420,900 966,180 Gross profit $ 529,720 $219,400 $ 749,120 Operating expenses: Store clerks wages expense $54,183 $26,067 $ 80,250 Truck drivers wages expense 67,430 16,470 83,900 Advertising expense 48,664 30,836 79,500 Store rent expense 14,592 8,208 22,800 Bad debt expense 9,000 8,900 17,900 Deprec. expense - delivery equip. 19,500 4,500 24,000 Other operating expenses 350,430 Total operating expenses $ 658,780 Operating income $ 90,340

  33. OTHER OPERATING EXPENSES Golf Tennis Total Direct expense $ 31,980 $116,400 $ 84,420 Indirect expense allocation: 159,380 74,650 234,030 $243,800 $106,630 $350,430 This broad range of expenses are assigned and allocated using many of the methods described previously.

  34. Annie’s 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 545,280 420,900 966,180 Gross profit $ 529,720 $219,400 $ 749,120 Operating expenses: Store clerks wages expense $54,183 $26,067 $ 80,250 Truck drivers wages expense 67,430 16,470 83,900 Advertising expense 48,664 30,836 79,500 Store rent expense 14,592 8,208 22,800 Bad debt expense 9,000 8,900 17,900 Deprec. expense - delivery equip. 19,500 4,500 24,000 Other operating expenses 243,800 106,630 350,430 Total operating expenses $ 658,780 Operating income $ 90,340

  35. Annie’s 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 545,280 420,900 966,180 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 $54,183 $26,067 $ 80,250 Truck drivers wages expense 67,430 16,470 83,900 Advertising expense 48,664 30,836 79,500 Store rent expense 14,592 8,208 22,800 Bad debt expense 9,000 8,900 17,900 Deprec. expense - delivery equip. 19,500 4,500 24,000 Other operating expenses 243,800 106,630 350,430 Total operating expenses $ 457,169 $ 201,611 $ 658,780 Operating income $ 72,551 $ 17,789 $ 90,340

  36. Annie’s 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 545,280 420,900 966,180 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 $54,183 $26,067 $ 80,250 Truck drivers wages expense 67,430 16,470 83,900 Advertising expense 48,664 30,836 79,500 Store rent expense 14,592 8,208 22,800 Bad debt expense 9,000 8,900 17,900 Deprec. expense - delivery equip. 19,500 4,500 24,000 Other operating expenses 243,800 106,630 350,430 Total operating expenses $ 457,169 $ 201,611 $ 658,780 Operating income $ 72,551 $ 17,789 $ 90,340

  37. 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 income • Indirect expenses are not allocated to specific departments

  38. Annie’s 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 545,280 420,900 966,180 Gross profit $ 529,720 $219,400 $ 749,120 Direct operating expenses: Store clerks wages expense $36,000 $15,250 $ 51,250 Direct Operating Margin helps us evaluate departmental performance. Truck drivers wages expense 29,000 29,000 Advertising expense 17,000 12,000 29,000 Bad debt expense 9,000 8,900 17,900 Deprec. expense - delivery equip. 9,000 9,000 Other operating expenses 84,420 31,980 116,400 Total direct operating expenses $ 184,420 $ 68,130 $ 252,550 Dept. direct operating margin $ 345,300 $151,270 $ 496,570 Indirect operating expenses: Store clerks wages expense $ 29,000

  39. Annie’s 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 545,280 420,900 966,180 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 $36,000 $15,250 $ 51,250 Truck drivers wages expense 29,000 29,000 Advertising expense 17,000 12,000 29,000 Bad debt expense 9,000 8,900 17,900 Deprec. expense - delivery equip. 9,000 9,000 Other operating expenses 84,420 31,980 116,400 Total direct operating expenses $ 184,420 $ 68,130 $ 252,550 Dept. direct operating margin $ 345,300 $151,270 $ 496,570 Indirect operating expenses: Store clerks wages expense $ 29,000

  40. Annie’s 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 Golf’s better Gross Profit, Golf still ended with a better Direct Operating Margin. Cost of goods sold 545,280 420,900 966,180 Gross profit $ 529,720 $219,400 $ 749,120 Direct operating expenses: Store clerks wages expense $36,000 $15,250 $ 51,250 Truck drivers wages expense 29,000 29,000 Advertising expense 17,000 12,000 29,000 Bad debt expense 9,000 8,900 17,900 Deprec. expense - delivery equip. 9,000 9,000 Other operating expenses 84,420 31,980 116,400 Total direct operating expenses $ 184,420 $ 68,130 $ 252,550 Dept. direct operating margin $ 345,300 $151,270 $ 496,570 Indirect operating expenses: Store clerks wages expense $ 29,000

  41. Annie’s 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 545,280 420,900 966,180 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 $36,000 $15,250 $ 51,250 Truck drivers wages expense 29,000 29,000 Advertising expense 17,000 12,000 29,000 Bad debt expense 9,000 8,900 17,900 Deprec. expense - delivery equip. 9,000 9,000 Other operating expenses 84,420 31,980 116,400 Total direct operating expenses $ 184,420 $ 68,130 $ 252,550 Dept. direct operating margin $ 345,300 $151,270 $ 496,570 Indirect operating expenses: Store clerks wages expense $ 29,000

  42. $ 68,130 $ 252,550 Total direct operating expenses $ 184,420 Dept. direct operating margin $ 345,300 $151,270 $ 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 Deprec. expense - delivery equip. 15,000 Other operating expenses 234,030 Total indirect operating exp. $ 406,230 Operating income $ 90,340 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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