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Departmentalized Profit and Cost Centers

Departmentalized Profit and Cost Centers

Section 1: Profit and Cost Centers and

Departmental Accounting

Chapter

25

Section Objectives1. Explain profit centers and cost centers.2. Prepare the Gross Profit section of a departmental income

statement.3. Explain and identify direct and indirect departmental expenses.4. Choose the basis for allocation of indirect expenses and

compute the amounts to be allocated to each department.

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Managerial Accounting

Provides financial information about business segments, activities, or products.

Supplies information on profitability of a specific department or order.

Provides data for making decisions.

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Explain profit centers and cost centers

Objective 1

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A cost center is a business segment that incurs costs but does not produce revenue.

ANSWER:

QUESTION:

What is a cost center?

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Cost centers do not directly earn revenue.

Cost centers often provide services to other business segments:

Accounting department

Information systems department

Purchasing department

Cost Centers

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A profit center is a business segment that produces revenue.

ANSWER:

QUESTION:

What is a profit center?

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Profit Centers

Accounting data is gathered and analyzed separately for each center.

Sells products or services to customers outside the business.

Can also be a segment of a company that provides a product to another revenue- producing segment.

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Responsibility Accounting allows management to evaluate the performance of each segment of the business and assigns responsibility for its financial segments.

Responsibility Accounting

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Prepare the gross profit section of a departmental income statement.

Objective 2

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Why do businesses track revenue and expenses by

segment?

QUESTION:

Detailed data on individual departments helps managers assess the profitability of

products and department operations.

ANSWER:

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Departmentalized Operations

Departmental accounts are included in the general ledger.

Sales and purchases are recorded by department.

Merchandise inventories are counted and reported by department.

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Departmental Accounts in the General Ledger

Sales—Clothing

Record all sales for the Clothing department.

Sales—Shoes

Record all sales for the Shoes department.

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Departmental Sales Journal

SALES JOURNAL PAGE 1   

SALES ACCOUNTS SALES TAX SALES— SALES— DATE SLIP CUSTOMER’S POST. RECEIVABLE PAYABLE CLOTHING SHOES NO. NAME REF. DEBIT CREDIT CREDIT CREDIT

2010 Jan. 2 1005 Ashley Morgan 106.40 6.40 100.00 3 1006 Robin Sullivan 477.00 25.00 300.00 150.00 3 1007 Billy Wilson 190.80 10.80 115.00 65.00

31 Totals 9,964.00 564.00 6,200.00 3,200.00 (111) (231) (401) (402)

Separate columns are kept for the two different departments.

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Departmental Income StatementFifth Avenue

Income Statement (Partial) Year Ended December 31, 2010

Clothing Shoes Total

Operating RevenueSales 487,950 162,650 650,600 Less Sales Returns and Allowances 4,125 1,375 5,500Net Sales 483,825 161,255 645,100Cost of Goods SoldMerchandise Inventory, Jan. 1, 20-- 32,000 15,000 47,000Purchases 216,000 48,000 264,000 Freight In 4,200 500 4,700 Delivered Cost of Purchases 220,200 48,500 268,700Less: Purchases Returns and Allowances 3,500 350 3,850 Purchases Discounts 4,000 400 4,400Total Deductions 7,500 750 8,250Net Delivered Cost of Purchases 212,700 47,750 260,450 Total Merchandise Available for Sale 244,700 62,750 307,450 Less Merchandise Inventory, Dec. 31, 20-- 29,650 9,500 39,150 Cost of Goods Sold 215,050 53,250 268,300 Gross Profit on Sales 268,775 108,025 376,800

Gross profit by department

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Explain and identify direct and indirect departmental expenses.

Objective 3

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Direct expenses can be identified directly with a department.

Indirect expenses cannot be directly related to an activity in a department.

Semidirect expenses cannot be directly assigned to individual departments, but are closely related to individual departments.

Operating Expenses

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Choose the basis for allocation of indirect expenses and compute the amounts to be allocated to each department.

Objective 4

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Takes place after adjusting entries have been made and adjusted trial balance completed.

Can be based on:

percent of sales,

percent of value of merchandise inventory,

percent of space occupied.

Allocating Semidirect and Indirect Expenses

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QUESTION:

How is rent expense generally allocated?

Rent expense is generally based on proportion of the square footage occupied.

Allocating Rent Expense

Rent Expense Allocation

x $19,200 = $ 15,360

x $19,200 = $ 3,840

$ 19,200

%

80

20

100

Basis: Dept. Square Feet

Clothing 2,400

Shoes 600

Total 3,000

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Insurance: Based on the cost of the furniture, fixtures, and inventory used in the

department’s operations.

Utilities: Based on square footage occupied.

Expense Allocations

Office Salaries: Based on total sales for each department.

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Do not apply to operations.

Are not allocated to departments.

Appear in the Other Income and Other Expenses section of the income statement.

Nondepartmentalized Expenses

Interest income and interest expenses are

not allocated to departments.

Departmentalized Profit and Cost Centers

Departmentalized Profit and Cost Centers

Section 2: Departmental

Income Statements

Chapter

25

Section Objectives5. Prepare a departmental income statement showing

the contribution margin and operating income for each department.

6. Use a departmental income statement in making decisions such as whether a department should be closed.

McGraw-Hill © 2009 The McGraw-Hill Companies, Inc. All rights reserved.

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Prepare a departmental income statement showing the contribution margin and operating income for each department.

Objective 5

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Reports net income from operations for each department after all expenses are allocated.

Highlights individual department’s financial information.

Identifies the contribution margin for each department.

Departmental Income Statement

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Use a departmental income statement in making decisions such as whether a department should be closed.

Objective 6

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Contribution margin is the amount that each department has earned beyond its direct costs.

ANSWER:

QUESTION:

What is contribution margin?

Gross profit on sales – Direct expense = Contribution margin

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Contribution Margin

Departments with a positive contribution margin help to pay the semidirect and indirect expenses of the business.

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Fifth AvenueIncome Statement (Partial)

Year Ended December 31, 2010

Clothing Shoes Total

Gross Profit on Sales 268,775 108,025 376,800Total Direct Expenses 106,947 37,025 143,972Contribution Margin 161,828 71,000 232,828Total Indirect Expenses 59,220 18,165 77,385Net Income from Operations 102,608 52,835 155,443

Departmental Income Statement

Net income from operations by department

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Limitations to Departmental Income from Operations

Difficult to determine fair allocation of semidirect and indirect expenses.

Difficult to assess outcome if certain departments were eliminated.

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The concept of contribution margin provides owners and managers with valuable assistance in making decisions.

Contribution Margin

Unfortunately, contribution margin figures are not provided in traditional financial reports.

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A business is said to “break-even” when total revenues equal total expenses.

Another way of describing the break-even point is when the contribution margin equals fixed expenses.

Dividing the Fixed costs by the unit contribution margin will result in the number of units that need to be sold to break even.

The units can be translated into sales dollars by multiplying the result by the selling price of the unit.

The Break-Even Point

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Thank Youfor using

College Accounting, 12th Edition

Price • Haddock • Farina