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CHAPTER TWENTY-SEVEN DEPARTMENTAL ACCOUNTING

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Page 1: CHAPTER TWENTY-SEVEN DEPARTMENTAL ACCOUNTING. Provides separate information about the revenues and expenses of each department Useful to management

CHAPTER TWENTY-SEVEN

DEPARTMENTAL ACCOUNTING

Page 2: CHAPTER TWENTY-SEVEN DEPARTMENTAL ACCOUNTING. Provides separate information about the revenues and expenses of each department Useful to management

DEPARTMENTAL ACCOUNTING

Provides separate information about the revenues and expenses of each department

Useful to management for three purposes:o Planning o Controlo Performance evaluation

Generally for internal financial statement userso Often only the income statement is prepared

Page 3: CHAPTER TWENTY-SEVEN DEPARTMENTAL ACCOUNTING. Provides separate information about the revenues and expenses of each department Useful to management

TotalTennisGolf

Annie’s Sporting GoodsIncome Statement

For Years Ended December 31, 20--

Net salesCost of goods soldGross profit

Operating expenses:Store clerks wages expenseTruck drivers wages expenseAdvertising expenseStore rent expenseBad debt expense

966,180$1,075,000

545,280$ 529,720

$640,300420,900

$219,400

$ 80,25083,90079,50022,80017,900

$1,715,300

$ 749,120

Deprec. expense - delivery equip. 24,000Other operating expenses 350,430

$ 658,780Total operating expensesOperating income $ 90,340

Sales, Cost of Goods Sold and Gross Profitare reported separately for each department.

Page 4: CHAPTER TWENTY-SEVEN DEPARTMENTAL ACCOUNTING. Provides separate information about the revenues and expenses of each department Useful to management

TotalTennisGolf

Annie’s Sporting GoodsIncome Statement

For Years Ended December 31, 20--

Net salesCost of goods soldGross profit

Operating expenses:Store clerks wages expenseTruck drivers wages expenseAdvertising expenseStore rent expenseBad debt expense

966,180$1,075,000

545,280$ 529,720

$640,300420,900

$219,400

$ 80,25083,90079,50022,80017,900

$1,715,300

$ 749,120

Deprec. expense - delivery equip. 24,000Other operating expenses 350,430

$ 658,780Total operating expensesOperating income $ 90,340

Gross Profit ÷ Net Sales$529,720 ÷ $1,075,000

49.3%Gross profit percentages

Page 5: CHAPTER TWENTY-SEVEN DEPARTMENTAL ACCOUNTING. Provides separate information about the revenues and expenses of each department Useful to management

TotalTennisGolf

Annie’s Sporting GoodsIncome Statement

For Years Ended December 31, 20--

Net salesCost of goods soldGross profit

Operating expenses:Store clerks wages expenseTruck drivers wages expenseAdvertising expenseStore rent expenseBad debt expense

966,180$1,075,000

545,280$ 529,720

$640,300420,900

$219,400

$ 80,25083,90079,50022,80017,900

$1,715,300

$ 749,120

Deprec. expense - delivery equip. 24,000Other operating expenses 350,430

$ 658,780Total operating expensesOperating income $ 90,340

Gross Profit ÷ Net Sales$219,400 ÷ $640,300

49.3%Gross profit percentages 34.3%

Page 6: CHAPTER TWENTY-SEVEN DEPARTMENTAL ACCOUNTING. Provides separate information about the revenues and expenses of each department Useful to management

TotalTennisGolf

Annie’s Sporting GoodsIncome Statement

For Years Ended December 31, 20--

Net salesCost of goods soldGross profit

Operating expenses:Store clerks wages expenseTruck drivers wages expenseAdvertising expenseStore rent expenseBad debt expense

966,180$1,075,000

545,280$ 529,720

$640,300420,900

$219,400

$ 80,25083,90079,50022,80017,900

$1,715,300

$ 749,120

Deprec. expense - delivery equip. 24,000Other operating expenses 350,430

$ 658,780Total operating expensesOperating income $ 90,340

Golf is earning a much biggergross profit percentage than Tennis.

49.3%Gross profit percentages 34.3%

Page 7: CHAPTER TWENTY-SEVEN DEPARTMENTAL ACCOUNTING. Provides separate information about the revenues and expenses of each department Useful to management

TotalTennisGolf

Annie’s Sporting GoodsIncome Statement

For Years Ended December 31, 20--

Net salesCost of goods soldGross profit

Operating expenses:Store clerks wages expenseTruck drivers wages expenseAdvertising expenseStore rent expenseBad debt expense

966,180$1,075,000

545,280$ 529,720

$640,300420,900

$219,400

$ 80,25083,90079,50022,80017,900

$1,715,300

$ 749,120

Deprec. expense - delivery equip. 24,000Other operating expenses 350,430

$ 658,780Total operating expensesOperating income $ 90,340

This does not mean that Golf ismore profitable overall, we must look

at the departmental operating expenses.

49.3%Gross profit percentages 34.3%

Page 8: CHAPTER TWENTY-SEVEN DEPARTMENTAL ACCOUNTING. Provides separate information about the revenues and expenses of each department Useful to management

OPERATING EXPENSES

Two classifications:o Direct

• Incurred for the sole benefit of and are traceable directly to a specific department

• Assigned to departments based on the actual expenses incurred

o Indirect• Incurred for the benefit of the business as a whole

and cannot be traced directly to a specific department

Page 9: CHAPTER TWENTY-SEVEN DEPARTMENTAL ACCOUNTING. Provides separate information about the revenues and expenses of each department Useful to management

TotalTennisGolf

Annie’s Sporting GoodsIncome Statement

For Years Ended December 31, 20--

Net salesCost of goods soldGross profit

Operating expenses:Store clerks wages expenseTruck drivers wages expenseAdvertising expenseStore rent expenseBad debt expense

966,180$1,075,000

545,280$ 529,720

$640,300420,900

$219,400

$ 80,25083,90079,50022,80017,900

$1,715,300

$ 749,120

Deprec. expense - delivery equip. 24,000Other operating expenses 350,430

$ 658,780Total operating expensesOperating income $ 90,340

Annie’s employs five store clerks.Two work in the Golf department,one in the Tennis department and

two assist customers in Both departments.

Page 10: CHAPTER TWENTY-SEVEN DEPARTMENTAL ACCOUNTING. Provides separate information about the revenues and expenses of each department Useful to management

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 beallocated between Golf and Tennis.

Page 11: CHAPTER TWENTY-SEVEN DEPARTMENTAL ACCOUNTING. Provides separate information about the revenues and expenses of each department Useful to management

STORE CLERK WAGES EXPENSE

Allocation is made based onpercentage of total sales.

Golf Tennis

Sales $1,075,000 $640,300Total Sales $1,715,300 $1,715,300

62.7% 37.3%

Page 12: CHAPTER TWENTY-SEVEN DEPARTMENTAL ACCOUNTING. Provides separate information about the revenues and expenses of each department Useful to management

STORE CLERKS WAGES EXPENSE

Direct expense

Golf Tennis Total

$36,000 $15,250 $51,250

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

Page 13: CHAPTER TWENTY-SEVEN DEPARTMENTAL ACCOUNTING. Provides separate information about the revenues and expenses of each department Useful to management

TotalTennisGolf

Annie’s Sporting GoodsIncome Statement

For Years Ended December 31, 20--

Net salesCost of goods soldGross profit

Operating expenses:Store clerks wages expenseTruck drivers wages expenseAdvertising expenseStore rent expenseBad debt expense

966,180$1,075,000

545,280$ 529,720

$640,300420,900

$219,400

$ 80,25083,90079,50022,80017,900

$1,715,300

$ 749,120

Deprec. expense - delivery equip. 24,000Other operating expenses 350,430

$ 658,780Total operating expensesOperating income $ 90,340

$54,183 $26,067

Page 14: CHAPTER TWENTY-SEVEN DEPARTMENTAL ACCOUNTING. Provides separate information about the revenues and expenses of each department Useful to management

TotalTennisGolf

Annie’s Sporting GoodsIncome Statement

For Years Ended December 31, 20--

Net salesCost of goods soldGross profit

Operating expenses:Store clerks wages expenseTruck drivers wages expenseAdvertising expenseStore rent expenseBad debt expense

966,180$1,075,000

545,280$ 529,720

$640,300420,900

$219,400

$ 80,25083,90079,50022,80017,900

$1,715,300

$ 749,120

Deprec. expense - delivery equip. 24,000Other operating expenses 350,430

$ 658,780Total operating expensesOperating income $ 90,340

$54,183 $26,067

Annie’s has 3 drivers.1 driver delivers only Golf equipment

and 2 drivers deliver both.

Page 15: CHAPTER TWENTY-SEVEN DEPARTMENTAL ACCOUNTING. Provides separate information about the revenues and expenses of each department Useful to management

TRUCK DRIVERS WAGES EXPENSE

Direct expense

Golf Tennis Total

$29,000 $ 0 $29,000

Salary of the one driver whodelivers only Golf equipment.

Page 16: CHAPTER TWENTY-SEVEN DEPARTMENTAL ACCOUNTING. Provides separate information about the revenues and expenses of each department Useful to management

TRUCK DRIVERS WAGES EXPENSE

Direct expense

Golf Tennis Total

$29,000 $ 0 $29,000

Indirect expense allocation:

70% x

30% x $54,900

The two other drivers are allocatedbased on the dollar amount of the

Golf and Tennis equipment delivered.

$54,900

Page 17: CHAPTER TWENTY-SEVEN DEPARTMENTAL ACCOUNTING. Provides separate information about the revenues and expenses of each department Useful to management

TRUCK DRIVERS WAGES EXPENSE

Direct expense

Golf Tennis Total

$29,000 $ 0 $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

Page 18: CHAPTER TWENTY-SEVEN DEPARTMENTAL ACCOUNTING. Provides separate information about the revenues and expenses of each department Useful to management

TotalTennisGolf

Annie’s Sporting GoodsIncome Statement

For Years Ended December 31, 20--

Net salesCost of goods soldGross profit

Operating expenses:Store clerks wages expenseTruck drivers wages expenseAdvertising expenseStore rent expenseBad debt expense

966,180$1,075,000

545,280$ 529,720

$640,300420,900

$219,400

$ 80,25083,90079,50022,80017,900

$1,715,300

$ 749,120

Deprec. expense - delivery equip. 24,000Other operating expenses 350,430

$ 658,780Total operating expensesOperating income $ 90,340

$54,183 $26,06767,430 16,470

Page 19: CHAPTER TWENTY-SEVEN DEPARTMENTAL ACCOUNTING. Provides separate information about the revenues and expenses of each department Useful to management

TotalTennisGolf

Annie’s Sporting GoodsIncome Statement

For Years Ended December 31, 20--

Net salesCost of goods soldGross profit

Operating expenses:Store clerks wages expenseTruck drivers wages expenseAdvertising expenseStore rent expenseBad debt expense

966,180$1,075,000

545,280$ 529,720

$640,300420,900

$219,400

$ 80,25083,90079,50022,80017,900

$1,715,300

$ 749,120

Deprec. expense - delivery equip. 24,000Other operating expenses 350,430

$ 658,780Total operating expensesOperating income $ 90,340

$54,183 $26,06767,430 16,470

Annie’s advertising in both thenewspaper and the radio

Page 20: CHAPTER TWENTY-SEVEN DEPARTMENTAL ACCOUNTING. Provides separate information about the revenues and expenses of each department Useful to management

ADVERTISING EXPENSE

NEWSPAPER

RADIO

GOLF TENNIS MIXED

Annie’s newspaper advertisingis based on the number of

inches of copy space.

$17,000 $12,000 $16,000

Page 21: CHAPTER TWENTY-SEVEN DEPARTMENTAL ACCOUNTING. Provides separate information about the revenues and expenses of each department Useful to management

ADVERTISING EXPENSE

NEWSPAPER

RADIO

GOLF TENNIS MIXED

All the radio advertisingis considered “mixed.”

$17,000 $12,000 $16,000

34,500

Page 22: CHAPTER TWENTY-SEVEN DEPARTMENTAL ACCOUNTING. Provides separate information about the revenues and expenses of each department Useful to management

ADVERTISING EXPENSE

NEWSPAPER

RADIO

GOLF TENNIS MIXED

$17,000 $12,000 $16,000

34,500$17,000 $12,000 $50,500

Page 23: CHAPTER TWENTY-SEVEN DEPARTMENTAL ACCOUNTING. Provides separate information about the revenues and expenses of each department Useful to management

ADVERTISING EXPENSE

Direct expense

Golf Tennis Total

$17,000 $12,000 $29,000

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 allocatedbased on the percentage of total sales.

Page 24: CHAPTER TWENTY-SEVEN DEPARTMENTAL ACCOUNTING. Provides separate information about the revenues and expenses of each department Useful to management

TotalTennisGolf

Annie’s Sporting GoodsIncome Statement

For Years Ended December 31, 20--

Net salesCost of goods soldGross profit

Operating expenses:Store clerks wages expenseTruck drivers wages expenseAdvertising expenseStore rent expenseBad debt expense

966,180$1,075,000

545,280$ 529,720

$640,300420,900

$219,400

$ 80,25083,90079,50022,80017,900

$1,715,300

$ 749,120

Deprec. expense - delivery equip. 24,000Other operating expenses 350,430

$ 658,780Total operating expensesOperating income $ 90,340

$54,183 $26,06767,430 16,47048,664 30,836

Page 25: CHAPTER TWENTY-SEVEN DEPARTMENTAL ACCOUNTING. Provides separate information about the revenues and expenses of each department Useful to management

TotalTennisGolf

Annie’s Sporting GoodsIncome Statement

For Years Ended December 31, 20--

Net salesCost of goods soldGross profit

Operating expenses:Store clerks wages expenseTruck drivers wages expenseAdvertising expenseStore rent expenseBad debt expense

966,180$1,075,000

545,280$ 529,720

$640,300420,900

$219,400

$ 80,25083,90079,50022,80017,900

$1,715,300

$ 749,120

Deprec. expense - delivery equip. 24,000Other operating expenses 350,430

$ 658,780Total operating expensesOperating income $ 90,340

$54,183 $26,06767,430 16,47048,664 30,836

Next we will split the rent.

Page 26: CHAPTER TWENTY-SEVEN DEPARTMENTAL ACCOUNTING. Provides separate information about the revenues and expenses of each department Useful to management

STORE RENT EXPENSE

Direct expense

Golf Tennis Total

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 consideredindirect (“mixed”) and will be

allocated based on square foot of floor space.

Page 27: CHAPTER TWENTY-SEVEN DEPARTMENTAL ACCOUNTING. Provides separate information about the revenues and expenses of each department Useful to management

TotalTennisGolf

Annie’s Sporting GoodsIncome Statement

For Years Ended December 31, 20--

Net salesCost of goods soldGross profit

Operating expenses:Store clerks wages expenseTruck drivers wages expenseAdvertising expenseStore rent expenseBad debt expense

966,180$1,075,000

545,280$ 529,720

$640,300420,900

$219,400

$ 80,25083,90079,50022,80017,900

$1,715,300

$ 749,120

Deprec. expense - delivery equip. 24,000Other operating expenses 350,430

$ 658,780Total operating expensesOperating income $ 90,340

$54,183 $26,06767,430 16,47048,664 30,83614,592 8,208

Page 28: CHAPTER TWENTY-SEVEN DEPARTMENTAL ACCOUNTING. Provides separate information about the revenues and expenses of each department Useful to management

TotalTennisGolf

Annie’s Sporting GoodsIncome Statement

For Years Ended December 31, 20--

Net salesCost of goods soldGross profit

Operating expenses:Store clerks wages expenseTruck drivers wages expenseAdvertising expenseStore rent expenseBad debt expense

966,180$1,075,000

545,280$ 529,720

$640,300420,900

$219,400

$ 80,25083,90079,50022,80017,900

$1,715,300

$ 749,120

Deprec. expense - delivery equip. 24,000Other operating expenses 350,430

$ 658,780Total operating expensesOperating income $ 90,340

$54,183 $26,06767,430 16,47048,664 30,83614,592 8,2089,000 8,900

All are direct expensesand are assigned based on

experience with accounts written off.

Page 29: CHAPTER TWENTY-SEVEN DEPARTMENTAL ACCOUNTING. Provides separate information about the revenues and expenses of each department Useful to management

TotalTennisGolf

Annie’s Sporting GoodsIncome Statement

For Years Ended December 31, 20--

Net salesCost of goods soldGross profit

Operating expenses:Store clerks wages expenseTruck drivers wages expenseAdvertising expenseStore rent expenseBad debt expense

966,180$1,075,000

545,280$ 529,720

$640,300420,900

$219,400

$ 80,25083,90079,50022,80017,900

$1,715,300

$ 749,120

Deprec. Exp. - delivery equip. 24,000Other operating expenses 350,430

$ 658,780Total operating expensesOperating income $ 90,340

$54,183 $26,06767,430 16,47048,664 30,83614,592 8,2089,000 8,900

3 trucks1 exclusively for Golf, other two used for both

Page 30: CHAPTER TWENTY-SEVEN DEPARTMENTAL ACCOUNTING. Provides separate information about the revenues and expenses of each department Useful to management

DEPRECIATION EXPENSE -DELIVERY EQUIPMENT

Direct expense

Golf Tennis Total

$ 9,000 $ 0 $ 9,000

Indirect expense allocation:

Depreciation on the one truck thatis exclusively used

for Golf equipment deliveries

Page 31: CHAPTER TWENTY-SEVEN DEPARTMENTAL ACCOUNTING. Provides separate information about the revenues and expenses of each department Useful to management

DEPRECIATION EXPENSE -DELIVERY EQUIPMENT

Direct expense

Golf Tennis Total

$ 9,000 $ 0 $ 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 allocatedbased on the dollar amount

of equipment delivered.

Page 32: CHAPTER TWENTY-SEVEN DEPARTMENTAL ACCOUNTING. Provides separate information about the revenues and expenses of each department Useful to management

TotalTennisGolf

Annie’s Sporting GoodsIncome Statement

For Years Ended December 31, 20--

Net salesCost of goods soldGross profit

Operating expenses:Store clerks wages expenseTruck drivers wages expenseAdvertising expenseStore rent expenseBad debt expense

966,180$1,075,000

545,280$ 529,720

$640,300420,900

$219,400

$ 80,25083,90079,50022,80017,900

$1,715,300

$ 749,120

Deprec. expense - delivery equip. 24,000Other operating expenses 350,430

$ 658,780Total operating expensesOperating income $ 90,340

$54,183 $26,06767,430 16,47048,664 30,83614,592 8,2089,000 8,900

19,500 4,500

Page 33: CHAPTER TWENTY-SEVEN DEPARTMENTAL ACCOUNTING. Provides separate information about the revenues and expenses of each department Useful to management

OTHER OPERATING EXPENSES

Direct expense

Golf Tennis Total

$ 84,420 $ 31,980 $116,400

Indirect expense allocation: 159,380 234,030

$243,800 $106,630 $350,430

This broad range of expenses are assignedand allocated using many of the methods

described previously.

74,650

Page 34: CHAPTER TWENTY-SEVEN DEPARTMENTAL ACCOUNTING. Provides separate information about the revenues and expenses of each department Useful to management

TotalTennisGolf

Annie’s Sporting GoodsIncome Statement

For Years Ended December 31, 20--

Net salesCost of goods soldGross profit

Operating expenses:Store clerks wages expenseTruck drivers wages expenseAdvertising expenseStore rent expenseBad debt expense

966,180$1,075,000

545,280$ 529,720

$640,300420,900

$219,400

$ 80,25083,90079,50022,80017,900

$1,715,300

$ 749,120

Deprec. expense - delivery equip. 24,000Other operating expenses 350,430

$ 658,780Total operating expensesOperating income $ 90,340

$54,183 $26,06767,430 16,47048,664 30,83614,592 8,2089,000 8,900

19,500 4,500243,800 106,630

Page 35: CHAPTER TWENTY-SEVEN DEPARTMENTAL ACCOUNTING. Provides separate information about the revenues and expenses of each department Useful to management

TotalTennisGolf

Annie’s Sporting GoodsIncome Statement

For Years Ended December 31, 20--

Net salesCost of goods soldGross profit

Operating expenses:Store clerks wages expenseTruck drivers wages expenseAdvertising expenseStore rent expenseBad debt expense

966,180$1,075,000

545,280$ 529,720

$640,300420,900

$219,400

$ 80,25083,90079,50022,80017,900

$1,715,300

$ 749,120

Deprec. expense - delivery equip. 24,000Other operating expenses 350,430

$ 658,780Total operating expensesOperating income $ 90,340

$54,183 $26,06767,430 16,47048,664 30,83614,592 8,2089,000 8,900

19,500 4,500243,800 106,630

$ 457,169 $ 201,611$ 72,551 $ 17,789

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.

Page 36: CHAPTER TWENTY-SEVEN DEPARTMENTAL ACCOUNTING. Provides separate information about the revenues and expenses of each department Useful to management

TotalTennisGolf

Annie’s Sporting GoodsIncome Statement

For Years Ended December 31, 20--

Net salesCost of goods soldGross profit

Operating expenses:Store clerks wages expenseTruck drivers wages expenseAdvertising expenseStore rent expenseBad debt expense

966,180$1,075,000

545,280$ 529,720

$640,300420,900

$219,400

$ 80,25083,90079,50022,80017,900

$1,715,300

$ 749,120

Deprec. expense - delivery equip. 24,000Other operating expenses 350,430

$ 658,780Total operating expensesOperating income $ 90,340

$54,183 $26,06767,430 16,47048,664 30,83614,592 8,2089,000 8,900

19,500 4,500243,800 106,630

$ 457,169 $ 201,611$ 72,551 $ 17,789

Operating Expense Percentages:Golf $457,169 ÷ $1,075,000 = 42.5%Tennis $201,611 ÷ $640,300 = 31.5%

Page 37: CHAPTER TWENTY-SEVEN DEPARTMENTAL ACCOUNTING. Provides separate information about the revenues and expenses of each department Useful to management

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 incomeo Indirect expenses are not allocated to specific

departments

Page 38: CHAPTER TWENTY-SEVEN DEPARTMENTAL ACCOUNTING. Provides separate information about the revenues and expenses of each department Useful to management

TotalTennisGolf

Annie’s Sporting GoodsIncome Statement

For Years Ended December 31, 20--

Net salesCost of goods soldGross profitDirect operating expenses:

Store clerks wages expenseTruck drivers wages expenseAdvertising expense

Total direct operating expenses

Bad debt expense

966,180$1,075,000

545,280$ 529,720

$640,300420,900

$219,400

$ 51,25029,000

17,9009,000

116,400

$1,715,300

$ 749,120

Deprec. expense - delivery equip.Other operating expenses

$ 252,550Dept. direct operating margin

$36,000 $15,25029,000

12,00017,0008,900

9,00084,420 31,980

$ 184,420 $ 68,130$151,270

29,0009,000

$ 345,300 $ 496,570Indirect operating expenses:

Store clerks wages expense $ 29,000

Direct Operating Margin helps usevaluate departmental performance.

Page 39: CHAPTER TWENTY-SEVEN DEPARTMENTAL ACCOUNTING. Provides separate information about the revenues and expenses of each department Useful to management

TotalTennisGolf

Annie’s Sporting GoodsIncome Statement

For Years Ended December 31, 20--

Net salesCost of goods soldGross profitDirect operating expenses:

Store clerks wages expenseTruck drivers wages expenseAdvertising expense

Total direct operating expenses

Bad debt expense

966,180$1,075,000

545,280$ 529,720

$640,300420,900

$219,400

$ 51,25029,000

17,9009,000

116,400

$1,715,300

$ 749,120

Deprec. expense - delivery equip.Other operating expenses

$ 252,550Dept. direct operating margin

$36,000 $15,25029,000

12,00017,0008,900

9,00084,420 31,980

$ 184,420 $ 68,130$151,270

29,0009,000

$ 345,300 $ 496,570Indirect operating expenses:

Store clerks wages expense $ 29,000

Direct Operating Margin percentageGolf $345,300 ÷ $1,075,000 = 32.1%Tennis $151,270 ÷ $640,300 = 23.6%

Golf is once again better! Is it because of theGross Profit or Operating Expenses or both?

Page 40: CHAPTER TWENTY-SEVEN DEPARTMENTAL ACCOUNTING. Provides separate information about the revenues and expenses of each department Useful to management

TotalTennisGolf

Annie’s Sporting GoodsIncome Statement

For Years Ended December 31, 20--

Net salesCost of goods soldGross profitDirect operating expenses:

Store clerks wages expenseTruck drivers wages expenseAdvertising expense

Total direct operating expenses

Bad debt expense

966,180$1,075,000

545,280$ 529,720

$640,300420,900

$219,400

$ 51,25029,000

17,9009,000

116,400

$1,715,300

$ 749,120

Deprec. expense - delivery equip.Other operating expenses

$ 252,550Dept. direct operating margin

$36,000 $15,25029,000

12,00017,0008,900

9,00084,420 31,980

$ 184,420 $ 68,130$151,270

29,0009,000

$ 345,300 $ 496,570Indirect operating expenses:

Store clerks wages expense $ 29,000

Direct Operating Expense percentageGolf $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.

Page 41: CHAPTER TWENTY-SEVEN DEPARTMENTAL ACCOUNTING. Provides separate information about the revenues and expenses of each department Useful to management

TotalTennisGolf

Annie’s Sporting GoodsIncome Statement

For Years Ended December 31, 20--

Net salesCost of goods soldGross profitDirect operating expenses:

Store clerks wages expenseTruck drivers wages expenseAdvertising expense

Total direct operating expenses

Bad debt expense

966,180$1,075,000

545,280$ 529,720

$640,300420,900

$219,400

$ 51,25029,000

17,9009,000

116,400

$1,715,300

$ 749,120

Deprec. expense - delivery equip.Other operating expenses

$ 252,550Dept. direct operating margin

$36,000 $15,25029,000

12,00017,0008,900

9,00084,420 31,980

$ 184,420 $ 68,130$151,270

29,0009,000

$ 345,300 $ 496,570Indirect operating expenses:

Store clerks wages expense $ 29,000

Direct Operating Margin also helps usdetermine the contribution a department

makes to the overall operating incomeof the company.

Page 42: CHAPTER TWENTY-SEVEN DEPARTMENTAL ACCOUNTING. Provides separate information about the revenues and expenses of each department Useful to management

Truck drivers wages expenseAdvertising expense

Total direct operating expenses

Store rent expense

54,90050,500

15,000234,030

Deprec. expense - delivery equip.Other operating expenses

$ 252,550Dept. direct operating margin

$ 406,230

$ 184,420 $ 68,130$151,270

22,800

$ 345,300 $ 496,570Indirect operating expenses:

Store clerks wages expense $ 29,000

$ 90,340Total indirect operating exp.

Operating income

Tennis department contributes $151,270to help cover the

indirect operating expenses.

Page 43: CHAPTER TWENTY-SEVEN DEPARTMENTAL ACCOUNTING. Provides separate information about the revenues and expenses of each department Useful to management

DISCONTINUING A DEPARTMENT

Management must focus on the revenues and expenses that will be eliminated if a department is discontinued.o Need to look at the Direct Operating Margin.o Indirect expenses are usually for the whole

business and therefore will not be reduced when a department is discontinued.

Page 44: CHAPTER TWENTY-SEVEN DEPARTMENTAL ACCOUNTING. Provides separate information about the revenues and expenses of each department Useful to management

DISCONTINUING A DEPARTMENT

Net SalesCost of Goods SoldGross MarginDirect Operating Expenses

Dept. Direct Oper. Margin

Indirect Operating ExpensesOperating income (loss)

Dept A Dept B Dept C

$210,000 $185,000 $170,000

Total

$565,000

115,000 110,000 96,000 321,000$ 95,000 $ 75,000 $ 74,000 $244,000

55,000 45,000 54,000 154,000

$ 40,000 $ 30,000 $ 20,000 $ 90,000

27,000 22,000 25,000 74,000$ 13,000 $ 8,000 $ (5,000) $ 16,000

Given the Net Loss, managementis considering discontinuing Dept. C.

Page 45: CHAPTER TWENTY-SEVEN DEPARTMENTAL ACCOUNTING. Provides separate information about the revenues and expenses of each department Useful to management

DISCONTINUING A DEPARTMENT

Net SalesCost of Goods SoldGross MarginDirect Operating Expenses

Dept. Direct Oper. Margin

Indirect Operating ExpensesOperating income (loss)

Dept A Dept B Dept C

$210,000 $185,000 $170,000

Total

$565,000

115,000 110,000 96,000 321,000$ 95,000 $ 75,000 $ 74,000 $244,000

55,000 45,000 54,000 154,000

$ 40,000 $ 30,000 $ 20,000 $ 90,000

27,000 22,000 25,000 74,000$ 13,000 $ 8,000 $ (5,000) $ 16,000

But Dept. C contributes $20,000to cover the indirect expenses!!!

Without it, profits would be even worse!!


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