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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; and Explain 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 in textiles, 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 and Profit & Loss Account of each Department at the end of the accounting year. Preparation of such Departmental Accounts is helpful to the business in the following respects: i. It enables the business to compare the performance of one Department with that of another. ii. It helps the business in formulating proper policies relating to the expansion of the business. New profitable lines of production of trading can be taken up while the existing lines of production or trading which are giving a loss can be closed down. iii. It helps in appropriate rewarding or penalizing the Department employees on the basis of the results shown by them. Maintenance of columnar subsidiary Books The preparation of Departmental Trading and Profit & Loss Account requires maintenance of proper subsidiary books having appropriate columns for different departments. For example, if a business has three departments A, B & C, the subsidiary books such as Purchases Book, Purchases Returns Book, Sales Book, Sales Returns Books etc., should have separate columns for each of the departments. Cash Book may also have columns for recording cash sales of each of the departments separately in case the volume of cash sales is quite large. The specimen of a Purchases Book having columns for different Departments 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 books also. DEPARTMENTALISATION OF EXPENSES In order to ascertain the profit or loss made by each department, it is necessary that each department is charged with a proper share of the various business expenses. The following basis may be adopted for departmentalization of such expenses:
Expenses incurred specifically for a particular department should be directly charged to that department. For example, salaries payable to each of the departmental managers will be charged to the respective departments. Similarly if there are separate electricity metres for each of the departments, the electricity should be charged to each of the departments on the basis of the electricity bills received for each one of them. capable of being apportioned over different departments on a suitable basis should be charged to the different departments, on such basis. Of course, there are no hard and fast rules as regards the basis to be applied for apportionment of such expenses. However, the following basis for apportionment may be adopted:
ii. Expenses which have been incurred for the business as a whole but
a. Departmental wages. Expenses which directly vary with the department wages can be apportioned on this basis. For example, premium for workmen’s compensation, insurance, E.S.I. may be apportioned on this basis. b. Capital value of the assets. Expenses such as depreciation of buildings, plants and machinery, fire insurance premiums in respect of these assets etc., may be apportioned on this basis.
c. Floor area. Expenses such as lighting ( unless metered separately), rent and
rates, wages of night watchman etc.. may be apportioned on this basis. and time keeping departments etc.. may be apportioned on this basis.
d. Number of workers employed. Expenses of workers’ canteen, welfare, personnel
e. Production hours of direct labour. Works manager’s remuneration, general over-
time expenses , cost of inter-departmental transport should be charged to the various departments in the ratio which the Departmental Direct Labour Hours bear to the Total Factory Direct Labour Hours.
f. Technical estimate. Advice of the technical personnel may also be useful for the
apportionment of certain expenses , eg., the cost of steam consumed by a particular department, may be estimated on the basis of the engineers’ estimate.
iii. Expenses which cannot be allocated or apportioned over different
departments in a reasonable manner , should be charged to the total profit of all the departments in a reasonable manner, should be charged to the total profit of all the departments taken together. For this purpose, the profit shown by the different departments should be brought down in one account which will be termed as the General Profit & Loss Account and all such expenses should be charged there. General Manager’s salary, Directors’ fees, Auditors’ remuneration, Interest on Debentures etc. are some of the expenses which fall in this category. TYPE OF PROBLEMS
The examination problems relating to departmental accounts can be put in the following categories:
1. Problems relating to Departmentalisation of Expenses
2. Problems relating to Computation of Departmental Costs 3. Problems relating to Inter-departmental Transfers: a. When such transfers are at cost b. When such transfers are at a price higher than the cost. Exhaustive illustrations have been given in the following pages in respect of each of these types of problems. Departmentalisation of Expenses
Illustration 7.1 M/s Raju Auto Garage have three departments, viz. (i)_ Cars and Trucks, ( ii) Two wheelers, and (iii) Servicing. The former two sell spare parts and occupy a godown-cum-showroom. The servicing department uses a garage and adjoining site.
The following particulars are extracted from the books of the business for the year ended 31st March, `1989, from which you are required to prepare : a. A Departmental Trading and Profit and loss Account, b. A General Profit and Loss Account, and c. A Balance Sheet Stock 1.4.88 Cars and Trucks Two-wheelers Purchases: Cars and Trucks Two-wheelers Sales: Cars and Trucks Two-Wheelers Servicing 6,00,000 3,00,000 3,50,000 1,10,000 Rs. 1,00,000 27,500
1,00,000 30,000 12,000 10,800 12,000 24, 000 2,72,000
Wages of counter-salesmen: Cars and Trucks Two-Wheelers
Wages of garage labour Office salaries and wages Godown and showroom rent Land and Garage Building
Office Expenses Garage Equipment Office Van 24,000
36,000 1,00,000 70,000
Showroom Furniture and Fittings Sundry Debtors Sundry Creditors Bank Overdraft Power and Lighting Bank Interest Cash in hand Drawings Account 12,000 60,000 17,200 36,000 1,000 900 12,000
Proprietor’s Capital Account
Following further information is available:
Included in “ Land and Garage Building “ is cost of site used by the servicing department Rs.2,00,000. Rs.
ii. Closing stock on 31.3.1989 at the departments: Cars and Trucks Two-wheelers 90,000 32,500
iii. 50% of power and lighting is to be charged to Servicing Department, the balance equally to the other departments. iv. Rates for depreciation are: Building 5% ; Garage Equipment 15%, Showroom furniture etc. 10% and Office Van 20% v. Outstanding expenses were: Rs. Interest 150 2,000 Office expenses
vi. Interest and all expenses relating to the office are to considered
common and charged to the General Profit and Loss A/c.
vii. The departments using the showroom share the space and furniture and fittings equally. (C.A. Entrance, Nov. 1979, adapted) (For Solution please see page 2.240 and below)
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