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Departmental Accounts

Departmental Accounts

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Published by: kom_swtangel on Jan 27, 2010
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03/02/2011

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Departmental Accounts
Learning Objectives
 
After studying this chapter you should be able to:Appreciate the utility of preparing departmental accounts;Understand the basis for departmentalization of expenses;Compute costs relating to different departments;Make appropriate accounting adjustments for inter-departmental transfer of goods or services; andExplain the meaning of certain key terms.
 
Utility of Departmental Accounts
 
Business may have a number of departments each dealing in a different type of goods.For example, one department may be dealing in medicines, the other may be dealing intextiles, still another may be dealing in provisions etc. In order to ascertain the profit or loss made by each Department, it will be advisable to prepare separately Trading andProfit & Loss Account of each Department at the end of the accounting year.Preparation of such Departmental Accounts is helpful to the business in the followingrespects:i.It enables the business to compare the performance of one Departmentwith that of another.ii.It helps the business in formulating proper policies relating to theexpansion of the business. New profitable lines of production of tradingcan be taken up while the existing lines of production or trading which aregiving a loss can be closed down.iii.It helps in appropriate rewarding or penalizing the Department employeeson the basis of the results shown by them.
 
Maintenance of columnar subsidiary Books
 
The preparation of Departmental Trading and Profit & Loss Account requiresmaintenance of proper subsidiary books having appropriate columns for differentdepartments. For example, if a business has three departments A, B & C, thesubsidiary books such as Purchases Book, Purchases Returns Book, SalesBook, Sales Returns Books etc., should have separate columns for each of thedepartments. Cash Book may also have columns for recording cash sales of each of the departments separately in case the volume of cash sales is quitelarge. The specimen of a Purchases Book having columns for differentDepartments is given below:
 
 
Purchases Book
 
Date Particulars L.F. Deptt. A Deptt. B Deptt. C Deptt. D
 
The same pattern of rulings may be followed in case of other subsidiary booksalso.
 
DEPARTMENTALISATION OF EXPENSES
 
In order to ascertain the profit or loss made by each department, it is necessarythat each department is charged with a proper share of the various businessexpenses. The following basis may be adopted for departmentalization of suchexpenses:
 
i.
Expenses incurred specifically for a particular department should bedirectly charged to that department. For example, salaries payable to eachof the departmental managers will be charged to the respectivedepartments. Similarly if there are separate electricity metres for each of the departments, the electricity should be charged to each of thedepartments on the basis of the electricity bills received for each one of them.
ii.
Expenses which have been incurred for the business as a whole butcapable of being apportioned over different departments on a suitablebasis should be charged to the different departments, on such basis. Of course, there are no hard and fast rules as regards the basis to beapplied for apportionment of such expenses. However, the following basisfor apportionment may be adopted:a.Departmental wages. Expenses which directly vary with the department wagescan be apportioned on this basis. For example, premium for workmen’scompensation, insurance, E.S.I. may be apportioned on this basis.b.Capital value of the assets. Expenses such as depreciation of buildings, plantsand machinery, fire insurance premiums in respect of these assets etc., may beapportioned on this basis.
c.
Floor area. Expenses such as lighting ( unless metered separately), rent andrates, wages of night watchman etc.. may be apportioned on this basis.
d.
Number of workers employed. Expenses of workers’ canteen, welfare, personneland time keeping departments etc.. may be apportioned on this basis.
 
 
e.
Production hours of direct labour. Works manager’s remuneration, general over-time expenses , cost of inter-departmental transport should be charged to thevarious departments in the ratio which the Departmental Direct Labour Hoursbear to the Total Factory Direct Labour Hours.
f.
Technical estimate. Advice of the technical personnel may also be useful for theapportionment of certain expenses , eg., the cost of steam consumed by aparticular department, may be estimated on the basis of the engineers’ estimate.
 
iii.
Expenses which cannot be allocated or apportioned over differentdepartments in a reasonable manner , should be charged to the total profitof all the departments in a reasonable manner, should be charged to thetotal profit of all the departments taken together. For this purpose, theprofit shown by the different departments should be brought down in oneaccount which will be termed as the General Profit & Loss Account and allsuch expenses should be charged there. General Manager’s salary,Directors’ fees, Auditors’ remuneration, Interest on Debentures etc. aresome of the expenses which fall in this category.TYPE OF PROBLEMS
 
The examination problems relating to departmental accounts can be put in thefollowing categories:
 
1.
Problems relating to Departmentalisation of Expenses2.Problems relating to Computation of Departmental Costs3.Problems relating to Inter-departmental Transfers:a.When such transfers are at costb.When such transfers are at a price higher than the cost.Exhaustive illustrations have been given in the following pages in respect of eachof these types of problems.
 
Departmentalisation of Expenses
 

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