Departmental-Accounts.pdf

Departmental accounts

1. Allocate common expenditures of the organisation among
various departments on appropriate basis

Deal with the inter-departmental transfers and their accounting
treatment

Calculate the amount of unrealised profit on unsold inter-
departmental stock-in-hand at the end of the accounting year

Institute of Chartered Accountants of In

2. 122

CHAPTER OVERVIEW

‘ACCOUNTING

Type of
Departments

Dependent Independent

Vork independently, have

Have inter-department transfers ils

Basis of Allocation of Common
Expenditure among different
Departments

Expenses incurred Common expenses distributed
special for among the departments on suitable
department are charged | bas

Inter-department transfers
(forming part of closing inventory)

Cost plus agreed

Market Price percentage of profit

No unrealised Cost [7 Elimination of unreaised
Profit exists Market price Market price profit through

4. ccupied

5. DEPARTMENTAL ACCOUNTS 125

maintenance, insurance of building | department (ff given) othe
time basis

Lighting and Heating expenses Consumption of

(eg, energy expenses) department

Selling expenses, eg, discount, bad | Sales of each department

debts, selling commission, freight

‘outward, travelling sales managers

salary and other costs

Carriage inward/ Discount received | Purchases of each department

Wages/Salari Time devoted to each department

Depreciation, insurance, repairs and | Value of assets of each department

maintenance of capital as ‘otherwise on time bas

Administrative and other expenses, | Time basis or equally among all

g. salaries of managers, directors, | departments

mmon advertisement expenses

tc

Labour welfare expenses Number of employees in each
department

PF/ESI contributions Wages and salaries of each
department

8. Closing Stock of Department Q
Goods send by Department P to Department Q at a price 50% ab

e profit of Department P included in the stock will be | 9,000
00050
150
Amount of the Stock Reserve will be

Al Total

9. DEPARTMENTAL ACCOUNTS

Particulars | A

To | opening
stock

una)

11040
Profit (ot)

129

| particutars |

dy | sakes | 244000

| [ Setting price of unit purchase:
(000 x 40
12,000 x45

Department A
Department B
Department € 14400 x
Total Selling Price
Less Purchase (Cost) Value
Gross Profit

200,000

Profit Margin Ratio =
iu 1500000

240000
540,000
1000

15,00,000
(6.00.000)

0

10. Selling Price (Per unit) ()
LessProfit Margin @ 60% () Profit
‘Margin is uniform for all depts at 6

Purchase price per unit ()
Number of units purchased
(Purchase cost per unit
purchased)

14400
288.000

Less:Purchases (units)
‚Opening Stock (Units)

Cost of Opening Stock (€)

Cost of Closing Stock

11. DEPARTMENTAL ACCOUNTS

Jearicutars | al Bl cpaniewlars | al bel
A dd d d y

To Opening
Stock
wna,

by
30,000)

o. Purchases | 120,000] 450,000)
wna,
To Gross
profit

(1)

786,000

Sales .08,000| 441.000]
A-5200x

8-9800x

C:15300x50

Closing

Department A
Department B

Department C

(6,000 units
(10000 uni

(15,000 units

xt 40)
xt 45)
E 2)

J price of purchased units

200,000
450,000

50.00

1400000

12. ‘ACCOUNTING

Particulars
price per unit (2)

Less: Profit margin @ 40% (2) Profit

‘margin is uniform for all depts.

Purchase price per unit () 2 30

No. of units purchased 5000 | 10,000 | 15,000

Purchases (purchase cost per unit x 00
units purchased)

Sales (Units)
Add: Closing Sto 600

10400 | 16000
Less: Purchases (Units) (6.000) | (10000) | (15,000)
Opening Stock (Units) 600 400 1,000

Cost of Opening Stock) | 600 400
14400 | 10,800

Cost of Closing Stock (2) 400x24 | 600x27 | 700x30

16200 | 21000

13. Opening.
Purchases

btors at end

furniture in each department
Floor space ok

ft)

Number of employees

Electricity consumed by

Carriage inwards

Carriage outwards

«count received
Rent, Rates and Taxes
Depreciation on furniture

Labour welfare expenses

15000
1,80,000
45000
20000

3000

135,000
17,500

90,000

20,000 | 10000

2,500

00

3000
2700
48000
2700

15. Carriage inwards
Carriage outwards
Advertisement

Discount allowed
Discount received

Rent, Rates and Taxes

Depreciation on furniture

Labour welfare s
Electricity expense
Provision for bad debts

2.15

Basis of allocation of expenses
Purchase:

Turnover (4:3:2)
Turnover (43:2)

Purchases (:2:1)

Floor Space occupied (6:5:4)
Value of furniture (22:1)
No. of Employees (5:43)
Units consumed (3:2:1)
Debtors balances (3:2:2)

16. Stock
Purchases

ages

Purchased

Goods

transferred

finished
Goods

Gross profit
PT

z z
20.000 | 12.000.
92,000 | o

al

100
=

7,000 |

Sales
Purchased Goods
transferted
Finished goods
transferred
Return of finished
Goods

Closing Stock

Purchased Goods.
Finished Good

Deptt. A | Deptt. 8
+ 7
140000 | 1,12.000
10,000

40000

000.

o
14,000

17. ‘Opening Stock 32,000 | By | Sales 000
Purchases 160,000 | By | Closing Stock:

Wages 20000 | | Purchased Goods 10,500
Carriage 4000 Goods

Stock Res 2196

Gross Profit c/d 82,304

3,00,500 [300500 |

18. Department P
Department

Department Q

Transfer from Q

Profit after charging Managers | 90,000 60,000 45,000

Add: Managers Commission (1
66667

Less: Unrealised profit on Stock 6, (21,000)

wn)

Profit, Before Managers

Commission

Less: Managers Commission 10%

Correct Profit after Managers |
Commission

19. oI +

Unrealised Profit
of
Department P 25x18 00
326
Departments | 20/100%48,000 3 8000 | 21000
9,600 11400
Department Q 1120X12,000 =
=2,000

Finished Leather| Shoes Department
Department ©
®)
Opening Stock (As on 3020,000 430,000
01.0420x2)
Purchas 1.50,00,000 260,000
Sales 1180,00,000 4520,000
Trai s 30,00,000

Manufacturing Exper 5,00,000

Selling Expenses 1,50,000 60,000

Rent and Warehousing 5,00

ck on 31.03.20X3

20. To Opening stock | _ 2020000

Transer 2000000)

Leather
509000)

210000)6y
prot ba

Amount
@

To General expenses 8,50,000

To Unrealised profit

(Refer WN)

To General net profit

(Bal. fig)

3143375

4020000

12.20 ACCOUNTING

to shoes

Deptt. | 3000000)

FE
@

4020000

By Net profit

4020000

22. 20x 20X1
To Balance b/d By Sales A/c
To Cost By Mark-up

Mark-up 050% 27,900 | By Balance c/d (bf)
To Purchases

Mark-up 050% 140,100
To Khadi A/c 6900

Mark-up@S0' 3450| 10350

23. DEPARTMENTAL ACCOUNTS 1223

20%
To Stock A/c

To Profit & Loss Ay

To Balance c/d [(1/3* of (51,350 +
1.000) 1,000]

To [Balance b/d
(10,500+22408) Si Deptt [6900
To [Purchases 75900 [Mark-up
e 03

By loss of 290

[E
{stock wc

By [Balance
law

95,600

24. To] stock A transfer) | 2300 By Palance b/d
To] Stock A (re-sale) 130 3,500 1,260)
To} Stock AVc (mark down) | 360 tock AVC

To Profitartoss AVC | 22685
To| Balance (1/4 of € | 2065
| 8260
|

Aspects of Departmental Accounting

(0 Computation of unrealised profit if inter-department transfers form part of
losing stock.

(i) Preparation of departmental trading and profit and loss account.
(fi) Monitoring stock movements with help of memorandum mark-up account.
Methods of maint

ing departmental accounts
There are two methods of keeping departmental accounts

(® _ Wien accounts of all departments are kept at in one book only
(i) When separate set of books are kept for each department.

Classification of Departments: () Dependent departments and (ij)
Independent departments,

he Institute of Chartered Ace

25. DEPARTMENTAL ACCOUNTS. 12.25

+ Basis of allocation of departmental expenses:

So. | Expenses Basis
1. | Rent, rates and taxes, repairs | Floor area occupied by each |
and maintenance, insurance of | department (if given) otherwise on |
building time basis
\2. | Lighting and Heating | Consumption of energy by each
expenses department
3. | Selling expenses, Sales of each department
4, | Carriage inward/ Discount | Purchases of each department
received
5. | Wages/Salaries Time devoted to each department
6. | Maintenance of capital assets | Value of assets of each department |
otherwise on time basis
7. | Administrative expenses | Time basis or equally among all|
departments |
8. | Labour welfare expenses | Number of employees in each |
department
9. | PF/ESI contributions Wages and salaries of each |
department

+ There are certain expenses and income, most being of financial nature, which
cannot be apportioned on a suitable basis; therefore they are recognised in the
combined Profit and Loss Account, for example, interest on loan, profit/loss on
sale of investment, etc.

= Goods and services may be charged by one department to another usually on
any of the three basis: ()Cost, (i) Current market price,(il) Cost plus
percentage of profit.

+ When profit is added in the inter-departmental transfers, the loading
included in the unsold stock at the end of the year is to be excluded before
final accounts are prepared so as to eliminate any anticipatory profit included
‘therein. This is done by creating an appropriate stock reserve by debiting the
combined Profit and Loss Account.

he Institute of Chartered Ace

26. ACCOUNTING

TEST YOUR KNOWLEDGE

Mcas
1

Departmental accounting helps in
(8) Evaluation of trading results of each department separately.
(b) Effective planning and control on each department.

(0 Both (a) and (b)

Selling commission expense is apportioned among departments in the
proportion of

(8) Average stock carried by each department.
(b) Number of units sold by each department
(© Sales of each department.

If Department A transfers goods lb Depaitment B at a price of 50% above cost,
what will be the amount of stgEK reserVe on unsold stock worth ¿9,000 of
Department 8?

(@) 3,000,
(b) 4500.
(0 1500

Goods and services may be charged by one department to another on.
(8) Market price

(b) Cost plus agreed percentage of profit.

(0 Both (a) and (b)

‘Administrative expenses are apportioned among various departments on basis
of

(8) Time spent by employees in each department
(b) Value of assets of each department.

(© Sales of each department.

Depreciation on assets is apportioned among various departments on basis of
(8) Value of assets of each department.

(b) Purchases of each department.

Institute of Chartered Ace

27. DEPARTMENTAL ACCOUNTS 12.27

(9 Sales of each department.

7. Expense of rent is apportioned among various departments on basis of
(@) _ Sales of each department.
(b) Floor area occupied by each department.
(Either (a) or (b)

8. When profit is added in inter-departmental transfers, unrealized proft included
in the closing stock at the year end (before preparing final accounts) is
eliminated by

(8) Creating an appropriate stock reserve.
(b) Debiting the combined profit and loss account
(Both (a) and (b)

9. If an organisation is interested jp d
profit, then

ining the separate departmental net

(@ Accounts of all department in one book only.
(6) Separate set of books are h department.
(© _ Departments transfer goods to each other for further processing
Theoretical Questions
1. Explain the significance of having departmental accounts for a business entity
2. _ Howwill you allocate the following expenses among different departments?
(0 Rent, rates and taxes, repairs and maintenance, insurance of building.
(} Lighting and Heating expenses (e.g. energy expenses)
(ii) Selling expenses.
Practical Problems

Question 1

Department A sells goods to Department B at a profit of 50% on cost and to
Department C at 20% on cost Department B sells goods to A and C at a profit of
25% and 15% respectively on sales. Department C charges 30% and 40% profit on
cost to Department A and B respectively

Stock lying at different departments at the end of the year are as under

28. ‘ACCOUNTING

Department A Department 8 Department €

Transfer from Department A 45,000 42000
Transfer from Department B 40,000, 72000
Transfer from Department € 39,000 42,000

Calculate the unrealised profit of each department and also total unrealised profit.
Question 2

Department X sells goods to Department Y at a profit of 25% on cost and to
Department Z at 10% profit on cost. Department Y sells goods to X and Z at a profit
‘of 15% and 20% on sales, respectively. Department Z charges 20% and 25% profit on
‘cost to Department X and Y, respectively.

Department Managers are entitled to 10% commission on net profit/subject to
unrealised profit on departmental sales being eliminated. Departmental profits after

charging Managers’ commission, but iment of unrealised profit are as
under
x
Department X 36,000
Department Y 27,000
Department Z 18,000

Stock lying at different departments at the end of the year are as under:

Dept. X Dept. Y Dept Z
z z z
Transfer from Department X = 15,000 11,000
Transfer from Department Y 14000 = 12,000
Transfer from Department Z 6,000 5,000 =

Find out the correct departmental Profits after charging Managers’ commission
Question 3

Department R sells goods to Department S at a profit of 25% on cost and
Department T at 10% profit on cost. Department S sells goods to R and T at a profit
‘of 15% and 20% on sales respectively. Department T charges 20% and 25% profit on
cost to Department Rand S respectively

29. DEPARTMENTAL ACCOUNTS 12.29

Department managers are entitled to 10% commission on net profit subject to
unrealised profit on departmental sales being eliminated. Departmental profits after
charging managers commission, but before adjustment of unrealised profit are as
under

x
Department R 54,000
Department s 40,500
Department T 27,000

Stock lying at different departments at the end of the year are as under

Depten | Depts | Deptt T |

Transfer from Department R
Transfer from Department S
Transfer from Department T

ind out the correct departmental profits after charging managers commission.

Question 4
Martis Ltd. has several departments. Goods supplied to each department are debited
to a Memorandum Departmental Stock Account at cost, plus a fixed percentage
(mark-up) to give the normal selling price. The mark-up is credited to a
memorandum departmental ‘Mark-up account, any reduction in selling prices (mark:
down) will require adjustment in the stock account and in mark-up account. The
mark up for Department A for the last three years has been 25%. Figures relevant to.
Department A for the year ended 31st March, 20X2 were as follows:

‘Opening stock as on 1st April, 20X1, at cost © 65000

Purchase at cost + 2,00,000

Sales ? 3,00,000

Its further ascertained that

(1) _ Shortage of stock found in the year ending 31.03.20X2, costing Y 1,000 were
written off

30. a

e

@

‘ACCOUNTING

Opening stock on 01.0420X1 including goods costing € 6,000 had been sold
during the year and bad been marked down in the selling price by & 600. The
remaining stock had been sold during the year.

Goods purchased during the year were marked down by ? 1,200 from a cost of
+ 15,000. Marked-down stock costing & 5,000 remained unsold on 31.03.20x2.
‘The departmental closing stock is to be valued at cost subject to adjustment
for mark-up and mark-down.

You are required to prepare:

0

0)
0)

A Departmental Trading Account for Department A for the year ended 31st
March, 20%2 in the books of Head Office

À Memorandum Stock Account for the year.

A Memorandum Mark-up Account for the year.

ANSWERS/ SOLUTIONS
Mcas
1.0 2.0 34) 4.() 5.() TO) 8.0 9.(b)

Theoretical Questions
1

‘The main advantages of departmental accounting are:
(0 _ Evaluation of performance;

(i) Growth potential of each department

(ii) Justification of capital outlay;

(1) Judgement of efficiency and
(Planning and control

s. | Expenses Basis
No.

Rent, rates and taxes, Floor area occupied by each
repairs and maintenance, [department (if given) other wise on
insurance of building |time basis

Lighting and Heating[Consumption of energy by each

31. DEPARTMENTAL ACCOUNTS 1231

pea (eg, eng deparimen
[owen
5 ema Sales ofeach parent

Practical Problems
1. Calculation of unrealised profit of each department and total unrealised profit

[ Dept A Dept.B| Dept.c| Total
q « dl
Unealsed Profit of
Department A 45000 x| 42000x
sonso=| 20120-| 22000
15000| 7.00
Department 8 40,0005 25 73000x|
10800 | 20800
Department © 29) 42000 x |
207 0/140 = | 21000
12000 |
| | 63800

2. Calculation of correct Profits

Ea aaa ee
x | 2
E el ig
Profit after charging managers | 36000] 27,000} 18000
Add back : Managers’ commission 4000 3,000 2.000
(1/9)
20000 30000| 200m
Less: Unrealised proft on stock| Lam) 4500 (2000
(Working Note)
Proft before Managers| 3600025500 18000
comision
Less: Commision for Department
Manager @ 10% 12,550) | (1800)
Departmental Profits after 32400 22.950 16200
nes cones

32. ACCOUNTING

Working Note :
Stock lying with
Dept. x Dept. Y] Dept. Z| Total]
g QG «| «|
Unrealised
Prof of
Donner 1/5x15,000 =3,000 | 1/11%11,000 =1,000 | 4000)
x
Department | 0:15%14,000 =2,100 020x12,000 =2400 | 4500,
Y
Department | 1/6x6,000 =1,000| 1/5x5.000 =1,000 2100)
z
3. Correct departmental profits
Department
R s 7
Y e e
Profit before adjustment of untealised profits 54000 | 40500 | 27000
‘Add : Managerial commission (1/9) 6000 | _4500| 2000
60000 | 45000 | 30000
Less: Unrealised profit on stock (Refer WN) 16.000) | 62750) | _8.000)
54000 | 38250 | 27.000
Less: Managers commission @ 10% 5400) | (2,825) | _(2700)
Profit after adjustment of unrealised profits 48600 | 34425 | 24.300 |
Working Notes:
Value of unrealised profit
Y
Transfer by department R to
S department (22,500 x25/125) = 4,500
1500 6,000

T department (16,500 x10/110)
Transfer by department S to
R department (27,000 x 15/100) = 3,150

Institute of Chartered Ace

33. DEPARTMENTAL ACCOUNTS 12.33

T department (18,000 x 20/100) = 3, 690 6750
‘Transfer by department T to
R department (9,000 » 20/120) = 1,500
S department (7,500 x 25/125) = 1.500 3,000 |
4
(Department Trading Account

For the year ending on 31.03.20X2

Inthe books of Head Office

Particulars e] Particulars Y
To Opening Stock 65000 | By Sales 300000
To Purchases 2.00.00 | By Shortage 1900
To Gross Profit /d (bf) 52,820 | By Closing Stock 22880
LL 323.880 323880
(i)

Memorandum stock account (for Department A) (at selling price)
ala parias q
To Balance b/d 81250] By Profit & Loss A/e 1000

® 65,000+25% of ? (Cost of Shortage)
65,000)
To Purchases 250000/8y Memorandum Departmental| 250
& 200000 + 25% of Mark up A (Load on
7 200,000) Shortage) 1,000 x 25%)
By Memorandum Departmental| 1,200
Mark-up A/c (Mark-down on
Current Purchases)
By Debtors A/c (Sales) 3,00,000
By Memorandum Departmental] 600
Mark-up Ae
(Mark Down on Opening Stock)
___| ay Balance c/a (64) _28200
331230 321250)

34. ACCOUNTING

in
‘Memorandum Departmental Mark-up Account
Particulars [Particulars |
To Memorandum Departmental | 250 | By Balance b/d 16250
Stock A/ (€ 1,000 x 25/100) (& 81,250 x25/125)
To Memorandum Departmental | 1,200 | By Memorandum 50,000
Stock A/c Departmental Stock Ae
To Memorandum Departmental | 600 | (€2,50,000 x25/125)
Stock A/c
To Gross Profit transferred to | 58,880
Profi & Loss A/c
To Balance c/d IR 28200 +
400%) x25/125 - 1.400] 5320
66,250 66250
* 1,200 x5,000/15,000] = & 400
Working Notes:
(0 _ Calculation of Cost of Sales
7
A | Sales as per Books 300000
8 | Ada: Mark-down in opening stock (given) 600
€ | Ada: mark-down in sales out of current Purchases
(1200 x 10,000 /15,000) 800
D | Value of sales if there was no mark-down (A+B+C) 301400
E | Less: Gross Profit (25/125 of * 3,01,400) subject to Mark
Down ( 600 + + 800) 60,280)
E | Cost of sales (0: 241120 |
(il) Calculation of Closing Stock
I 7
A | Opening Stock 65000
B | Add: Purchases 2.00.00
© | Less: Cost of Sales (241,120)
D | Less: shortage (1000)
E | closing Stock (A+8-C-D) 22,880

Note: It has been assumed that mark up (given in question) is determined as a
percentage of cost.