Departmental Accounting Chapter 25

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

Cost Centers Profit Centers Learning Unit 25-1

Catlin’s Department Store Income Statement Showing Departmental Gross Profit Year Ended December 31, 200x Children’s Adult Total Net Sales$565,500$275,800$841,300 Cost of Goods Sold 269, , ,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 Children’s Adult Total Net Sales$565,500$275,800$841,300 Cost of Goods Sold 269, , ,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 Learning Unit 25-1

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

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

Learning Unit 25-2 n What are some examples of direct expenses? – sales salaries – delivery expense – advertising expense

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

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

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

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

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

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

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

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

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

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

Learning Unit 25-3 n 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.

Catlin’s Department Store Children’s Adult Total Net Sales$565,500$275,800$841,300 Cost of Goods Sold 269, , ,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 Children’s Adult Total Net Sales$565,500$275,800$841,300 Cost of Goods Sold 269, , ,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 Learning Unit 25-2

End of Chapter 25