fear \ ana 3 DEPARTMENTAL ACCOUNTSBasis of Allocation of Common Expenditure among different Expenses incurred specially Common expenses distributed among the departments on suitable basis. ‘© The Institute of Chartered Accountants of IndiaG1. INTRODUCTION If a business consists of several independent activities, or is divided into several departments, for carrying on separate functions, its management is usually interested in finding out the working results of each department to ascertain their relative efficiencies. This can be made possible only if departmental accounts are prepared, Departmental accounts are of great help and assistance to the managements as they provide necessary information for controlling the business more intelligently and effectively. Its also helpful in readily identifying all types of wastages, e.g., wastage of material or of money; Also, attention is drawn to inadequacies or inefficiencies in the working of departments or units into which the business may be divided. (G2. ADVANTAGES OF DEPARTMENTAL ACCOUNTING The main advantages of departmental accounting are as follows 1. Evaluation of performance: The performance of each department can be evaluated separately on the basis of trading results. An endeavor may be made to push up the sales of that department which is earning maximum profit. 2. Growth potential of each department: The growth potential of a department as compared to others can be evaluated. 3. Justification of capital outlay: \t helps the management to determine the justification of capital outlay in each department. 4. Judgement of efficiency: It helps to calculate stock turnover ratio of each department separately, and thus the efficiency of each department can be revealed. 5. Planning and control: Availability of separate cost and profit figures for each department facilitates better control. Thus, effective planning and control can be achieved on the basis of departmental accounting information. Basically, an organisation usually divides the work in various departments, which is done on the principle of division of labour. Each department prepares its separate accounts to judge its individual performance. This can improve efficiency of each and every department of the organisation. © The Institute of Chartered Accountants of IndiaG3. METHODS OF DEPARTMENTAL ACCOUNTING There are two methods of keeping departmental accounts: 3.1 Accounts of all departments are kept in one book only To prepare such accounts, it will be necessary first, for the income and expenditure of department to be separately recorded in subsidiary books and then for them to be accumulated under separate heads in a ledger or ledgers. This may be done by having columnar subsidiary books and a columnar ledger. 3.2 Separate set of books are kept for each department A separate set of books may be kept for each department, including complete stock accounts of goods received from or transferred to other departments or as also sales. Nevertheless, even when separate sets of books are maintained for different departments, it will also be necessary to devise a basis for allocation of common expenses among the different departments, if an organisation is interested in determining the separate departmental net profit in addition to the gross profit. Methods of keeping departmental accounts Accounts of all departments are kept in ) | Separate set of books are kept for each ‘one book only department Income and expenditure of department is | J Each department maintains separate books separately recorded in subsidiary books and then | JJ including complete stock accounts of goods ‘accumulated under separate heads in a ledger or | |} received from or transferred to other departments ledgers. This may be done by having columnar | j or as also sales. Common expenses need to be subsidiary books and a columnar ledger. allocated to determine profitability. (Ga. BASIS OF ALLOCATION OF COMMON EXPENDITURE AMONG DIFFERENT DEPARTMENTS Expenses should be allocated among different departments on a rational basis while preparing departmental accounts. © The Institute of Chartered Accountants of IndiaIndividual Identifiable Expenses: Expenses incurred specially for a particular department are charged directly thereto, e.g,, insurance charges of stock held by the department. Common Expenses: Common expenses, the benefit of which is shared by all the departments and which are capable of precise allocation are distributed among the departments concerned on some equitable basis considered suitable in the circumstances of the case. Allocation of Expenses 1. | Rent, rates and taxes, repairs and | Floor area occupied by each maintenance, insurance of building | department (if given) otherwise on time basis 2. | Lighting and Heating expenses Consumption of energy by each (eg. energy expenses) department 3, | Selling expenses, eg, discount, bad | Sales of each department debts, selling commission, freight outward, travelling sales manager's salary and other costs 4, _| Carriage inward/ Discount received _| Purchases of each department 5. | Wages/Salaries Time devoted to each department 6. | Depreciation, insurance, repairs and] Value of assets of each maintenance of capital assets department otherwise on time basis 7. | Administrative and other expenses, | Time basis or equally among all eg,, salaries of managers, directors, | departments common advertisement expenses, etc. 8. | Labour welfare expenses Number of employees in each department 9. | PF/ESI contributions Wages and salaries of each department Note: 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. © The Institute of Chartered Accountants of India(G5. TYPES OF DEPARTMENTS There are two types of departments: Dependent and Independent Departments. 5.1. Independent Departments Departments which work independently of each other and have negligible inter- department transfers are called Independent Departments. 5.2 Dependent Departments Departments which transfer goods from one department to another department for further processing are called dependent departments. Here, the output of one department becomes the input for the other department. These transfers may be done at cost or some pre-decided selling price. The price at which this is done is known as transfer price. In these departments, unloading is required if the transfer price is having a profit element, The method of eliminating unrealised profit is being discussed in the succeeding para. (G6. INTER-DEPARTMENTAL TRANSFERS Whenever goods are transferred from or services are provided by one department to another, their cost should be separately recorded and charged to the department benefiting thereby and credited to that providing the goods or services. The totals of such benefits (inter-departmental transfers) should be disclosed in the departmental Profit and Loss Account, to distinguish them from other items of expenditure. 6.1 Basis of Inter-Departmental Transfers Goods and services may be charged by one department to another usually on either of the following three bases: @ Cost, (i) Current market price, (i Cost plus agreed percentage of profit. 6.2 Elimination of Unrealised Profit When profit is added in the inter-departmental transfers the loading included in the unsold inventory at the end of the year is to be excluded before final accounts are prepared so as to eliminate any anticipatory yet unrealized (internal) profit included therein. © The Institute of Chartered Accountants of India6.3 Stock Reserve Unrealised profit included in unsold stock at the end of accounting periods eliminated by creating an appropriate stock reserve by debiting the combined Profit and Loss Account. The amount of stock reserve will be calculated as: Transfer price of unsold stock «Profit includedin transfer price Transfer price 6.4 Journal Entry At the end of the accounting year, the following journal entry will be passed for elimination of unrealised profit (creation of stock reserve): Profit and Loss Account Dr. To Stock Reserve (Being a provision made for unrealised profit included in closing stock) In the beginning of the next accounting year, the aforesaid journal entry will be reversed as under: Stock Reserve Dr. To Profit and Loss Account (Being provision for unrealised profit reversed.) 6.5 Disclosure in Balance Sheet The unsold closing stock acquired from another department will appear on the assets side of the balance sheet as under: (An extract of the assets side of the balance sheet) Current assets 00K Stock 10 Less: Stock reserve 20% x0 Mlustration 1 Goods are transferred from Department P to Department Q at a price 50% above cost. If closing stock of Department Q is ® 27,000, compute the amount of stock reserve. © The Institute of Chartered Accountants of IndiaSolution Closing Stock of Department Q 27,000 Goods send by Department P to Department Q at a price 50% above cost Hence profit of Department P included in the stock will be -| 9,000 27,000x50_ Amount of the Stock Reserve will be = 9,000. Working Note: Dept P transfers goods to Dept Q at a profit of 50% of cost. Hence, if cost is € 100/- the profit = % 50 and Transfer Price = & 150. Therefore, the profit of Dept P included in the stock value of Dept Q is one - third of the sale value Mlustration 2 ZLtd. has three departments and submits the following information for the year ending on 31% March, 20X1: Purchases (units) 6,000 12,000 | 14,400 Purchases (Amount) 6,00,000 Sales (Units) 6,120 11,520 | 14,976 Selling Price (per unit) = 40 45 50 Closing Stock (Units) 600 960 36 You are required to prepare departmental trading account of Z Ltd,, assuming that the rate of profit on sales is uniform in each case. Solution Departmental Trading Account for the year ended on 31% March, 20X1 [To|Opening Stock] 11,520} 8,640] 12,240|By|sales 2,44,800| 5,18,400|7,48,800| a) |A- 6120 x 40 B- 11,520 x 45 IC 14,976 x50 © The Institute of Chartered Accountants of India[To] Purchases 96,000| 216,000] 2,88,000|8y|closing stock] 9,600 17,280] 720] (wN2) (win) |To| Gross Profit (bf) 1,46.880| 3,11,040| 449.280 254.400] 5,35,680] 7.49520 254,400] 5,35,680)7.49,520 Working Notes: (1) Profit Margin Ratio Department A 6,000 x 40 2,40,000 Department B 12,000 x 45 5,40,000 Department C 14,400 x 50 20,000 Total Selling Price 15,00,000 Less: Purchase (Cost) Value {6,00,000) Gross Profit 9.00,000 Profit Margin Ratio = Selling Price (Per unit) (®) 40 45 50 Less:Profit Margin @ 60% (2) 24) @2n) Go Profit Margin is uniform for all depts at 60% Purchase price per unit (2) 16| _18| __20 Number of units purchased 6,000] 12,000] 14,400 (Purchase cost per unit x Units purchased) | 96,000 | 2,16,000| 2,88,000 © The Institute of Chartered Accountants of India(3) Statement showing calculation of department-wise Opening Stock (in Units) Sales (Units) Adad:Closing Stock (Units) Less:Purchases (units) Opening Stock (Units) (4) Statement showing department-wise cost of Opening Stock and Closing Stock Cost of Opening Stock (2) 720x 16 | 480x 18] 612x20 2] _11520] _8640| 12,240 Cost of Closing Stock 600x 16 | 960x 18] 36x20 =| _ 9.600 | 17.280 720 Illustration 3 M/s Omega is a departmental store having three departments X, Y and Z. The information regarding three departments for the year ended 31 March, 20X1 are given below: Opening Stock 36,000] 24,000 20,000 Purchases 1,32,000| 88,000) 44,000 Debtors at end 15,000! 10,000) 10,000 Sales 1,80,000 | 1,35,000 | 90,000 Closing stock 45,000| 17,500) 27,000 Value of furniture in each department 20,000| 20,000 10,000 Floor space occupied by each department (in [Link]) | 3,000] 2,500) 2,000 ‘Number of employees in each Department 25 20 15 Electricity consumed by each department (in units) | _300 200| 100 © The Institute of Chartered Accountants of IndiaThe balances of other revenue items in the books for the year are given below: Carriage inwards 3,000 Carriage outwards 2,700 Salaries 48,000 Advertisement 2,700 Discount allowed 2,250 Discount received 1,800 Rent, Rates and Taxes 7,500 Depreciation on furniture 1,000 Electricity expenses 3,000 Labour welfare expenses 2,400 You are required to prepare Departmental Trading and Profit and Loss Account for the year ended 31" March, 20X1 after providing provision for Bad Debts at 5%. © The Institute of Chartered Accountants of IndiaACCOUNTING (9) word 19N OL uowepeideg 0} sore, ue soiey Woy 01 Pamole tuno2sia 0 uourssaisapy OL saueres o1 Appa. oL sprewing a6eue> 01 anaes yunodsig Aq P/q word s5019 hg va P/> Wold $5019 OL spiemu) a6ewe> o] saseyping OL (Guuado) os of eBaulo S/W 40 S4OOg UL Lx0z ‘YUEN LE Papua sea ay 405 juNo2>¥y 507 pue yodd 7 BuIpedy jequaunsedag uoninjos © The Institute of Chartered Accountants of IndiaWorking Note: Carriage inwards Purchases (3: Carriage outwards Turnover ([Link]) Salaries No. of Employees ([Link]) Advertisement Turnover ([Link]) Discount allowed Turnover ([Link]) Discount received Purchases ([Link] Rent, Rates and Taxes Floor Space occupied ([Link]) Depreciation on furniture Value of furniture ([Link]) Labour welfare expenses No. of Employees ([Link]) Electricity expense Units consumed ([Link]) Provision for bad debts 5% of respective debtors balance Illustration 4 M/s X has two departments, A and B. From the following particulars prepare the consolidated Trading Account and Departmental Trading Account for the year ending 31st December, 20X1: A B = = Opening Stock [consisting of purchased goods -at cost] 20,000 12,000 Purchases 92,000 68,000 Sales 1,40,000 1,12,000 Wages 12,000 8,000 Carriage 2000 2,000 Closing Stock: () Purchased goods 4,500 6,000 (i) Finished goods 24,000 14,000 Purchased goods transferred: byBtoA 10,000 © The Institute of Chartered Accountants of IndiabyAtoB 8,000 Finished goods transferred: byAtoB 35,000 byBtoA 40,000 Return of finished goods: byAtoB 10,000 byBtoA 7,000 You are informed that purchased goods have been transferred mutually at their respective departmental purchase cost and finished goods at departmental market price and that 20% of the finished stock (closing) at each department represented finished goods received from the other department. Solution M/s X Departmental Trading A/c for the year ending 31st December, 20X1 z Stock Sales 1,40,000 Purchases Purchased Goods | 8,000 transferred Wages inished goods | 35,000 transferred Carriage , Return of finished 10,000 Goods Purchased Closing Stock: Goods transferred Purchased Goods Finished Finished Goods Goods transferred Return of finished Goods © The Institute of Chartered Accountants of IndiaTo| Gross profit] 38,500 | 46,000 c/d (bf) 2,21,500 | 1,89,000 2,21,500 | 1,89,000 Consolidated Trading Account for the year ending 31% December, 20X1 To | Opening Stock 32,000 | By | Sales 2,52,000 To | Purchases 1,60,000 | By | Closing Stock: To | Wages 20,000} _| Purchased Goods 10,500 To Carriage 4,000 Finished Goods 38,000 To _| Stock Reserve 2,196 To | Gross Profit ¢/d 82,304 3,00,500 3,00,500 Working note: Deptt. A Deptt. B Sale 1,40,000 1,12,000 Add: Transfer 35,000 40,000 1,75,000 1,52,000 Less: Returns (Z.000) (10,000) Net Sales plus Transfer 168,000 1,42,000 Rate of Gross profit es x100 = 22.916% aaa x100 = 32,394% Closing Stock out of transfer 4,800 2,800 (20% of closing stock) Unrealised Profit 4,800 x 32.394% = 1,555 2,800 x 22.916% = 641 Ilustration 5 Department P sells goods to Department S at a profit of 25% on cost and to Department Qat a profit of 15% on cost. Department S sells goods to P and Q at a profit of 20% and 30% on sales respectively. Department Q sells goods to P and $ at 20% and 10% profit on cost respectively. © The Institute of Chartered Accountants of IndiaDepartmental Managers are entitled to 10% commission on net profit subject to unrealised profit on departmental sales being eliminated. Departmental profits after charging Manager's commission, but before adjustment of unrealised profits are as below: Department P 90,000 Department S 60,000 Department Q 45,000 Stock lying at different Departments at the end of the year are as below: DEPARTMENTS P g Q Transfer from P -| 18000 14,000 Transfer from S 48,000 - 38,000 Transfer from Q 12,000} 8,000 = Find out correct Departmental Profits after charging Managers’ Commission. Solution Calculation of correct Departmental Profits Profit after charging Manager's 90,000 60,000 45,000 Commission ‘Add: Manager's Commission (1/9) 10,000 6,667 5,000 1,00,000 66,667 50,000 Less: Unrealised profit on Stock (5,426) (21,000) (2,727) (WN) Profit Before Manager's 94,574 45,667 41,273 Commission Less: Manager's Commission 10% (9457) (4567) (4727) Correct Profit after Manager's 85,117 41,100 42,546 Commission © The Institute of Chartered Accountants of IndiaWorking Notes: Unrealised Profit of: Department P_ 25/125X18,000 | 15/115X14,000 =3,600 =1,826 Department S 20/100x48,000 - | 30/100x38,000 =9,600 =11,400 Department Q 20/120X12,000 | 10/110X8,000 2,000 =727 Illustration 6 M/s, Suman Enterprises has two Departments, Finished Leather and Shoes. Shoes are made by the Firm itself out of leather supplied by Leather Department at its usual selling price. From the following figures, prepare Departmental Trading and Profit & Loss Account for the year ended 31st March, 20X3: Opening Stock (As on 01.04.20X2) Purchases Sales Transfer to Shoes Department ‘Manufacturing Expenses Selling Expenses Rent and Warehousing Stock on 31.03.20X3 The following further information are available for necessary consideration: (i) The stock in Shoes Department may be considered as consisting of 75% of Leather and 25% of other expenses. (ii) The Finished Leather Department earned a Gross Profit @ 15% in 20X1-X2. (iii) General expenses of the business as a whole amount to # 8,50,000. © The Institute of Chartered Accountants of IndiaSolution Department for the year ended 31st March, 20X3 I Trading and Profit and Loss Account [To Opening stock] 30,20,000] 430,000] 3450,000)ay Sales | 1,80,00000) 45,20,000] 2,25,20,000 [To Purchases | 1,50,00,000] 2,60,000| 1,52,60,000]8y Transfer lo shoes lbeptt. 30,00,000] -| 30,00,000] [To Transfer from 30,00,000) 30,00,000]8y Closing} 12,20,000| 5,00,000) _17,20,000] Leather stock Department [To Manufacturing} 300,000] 5,00,000 expenses, [To Gross. profit} 42,00,000] 830,000] 50,30,000 ia (oh) 22220,000| 5020,000| 2,72,40,000 2,22,20000| 5020,000| 2,72-40,000 [To Setting 1,50.000] 60,000/ 2,10,000|8y Gross] 42,00.000) 8.30,000) 500,000 expenses profit bra [To Rent & 5,00,000} 390,000] 8,00,000 warehousing [To Net profit os) 35,50,000| 470,000| _40,20,000 42,00,000| 830,000] _50,30,000 42,00,000| 830,000] _50,30,000 General Profit and Loss Account To General expenses To Unrealised profit (Refer W.N.) To General net profit (Bal. fig.) 8,50,000 | By Net profit 40,20,000 26,625 31,43,375 40,20,000 40,20,000 Working Note: Calculation of Stock Reserve Rate of Gross Profit of Finished leather Department, for the year 20X2-X3 _ Gross Profit Total Sales © The Institute of Chartered Accountants of India x 100 = [(42,00,000)/ (1,80,00,000 + 30,00,000)] x100 = 20%Closing Stock of Finished leather in Shoes Department = 75% ie. € 5,00,000 x 75% =% 3,75,000 Stock Reserve required for unrealised profit @ 20% on closing stock % 3,75,000 x 20% = % 75,000 Stock reserve for unrealised profit included in opening stock of Shoes dept. @ 15% ie. (% 4,30,000 x 75% x 15%) = % 48,375 Additional Stock Reserve required during the year = % 75,000 - % 48,375 = % 26,625 7. MEMORANDUM STOCK AND MEMORANDUM MARK UP ACCOUNT METHOD This method is generally used to have an appropriate control on stock movement of various departments. Please note that the departments prepare only memorandum accounts and hence these are just control accounts. Under this method every department maintains: * A Memorandum Stock Account which records all stock movements: opening balance, purchases, stock transfers, shortages and sales. It is prepared at selling price (i.e. even the purchases and opening / closing balances are adjusted by adding the mark-up), and + AMemorandum Mark-up Account which is prepared for loading or mark- up on cost (selling price — cost price) in the memorandum stock account. Various accounting adjustments that are required to be made under this method are as follows:- 1. Opening stock is recorded on the debit side of the Memorandum Stock A/c at selling price (Cost + Mark-up) and the respective Mark-Up is noted on the credit side of the Mark-Up Account. Accordingly, any Mark-down (lowering of cost) will have reverse impact. 2. Similarly, any purchases (debit) or stock transfers (debit or credit) are also recorded at selling price itself in the Memorandum Stock Account and its corresponding mark-up is recorded in the Memorandum Mark-up A/c. © The Institute of Chartered Accountants of India3. Any sales are credited to the Memorandum Stock A/c and they are anyways at selling price and hence no loading is required and no mark-up is required to be noted in the Mark-up A/c accordingly. 4. Any theft or shortage or loss of stock is also credited to the Memorandum Stock A/c at its cost-plus mark-up i.e. at selling price and the corresponding mark-up is debited to the Memorandum Mark-up Account. 5, Management may decide to make an ad-hoc amount of mark up on any of the stock and accordingly the adjustment has to be recorded in both the the selling price of any goods is reduced below its normal selling price, the reduction ‘marked down’ is adjusted both in the Stock Account and the Departmental Mark-up Account, 6. At the end of the period, mark-up on the closing stock (which shall be the balancing figure of Memorandum Stock A/c) is also recorded in the Memorandum Mark-up A/c. Accordingly, the balance remaining in the Mark- up A/c should reflect profit or loss for the period (which can also be verified by calculating the mark-up % on sales) Illustration 7 Gram Udyog, a retail store, has two departments, ‘Khadi and Silks’ for each of which stock account and memorandum ‘mark up’ accounts are kept. All the goods supplied to each department are debited to the stock account at cost plus a ‘mark up’, which together make-up the selling-price of the goods and the sale proceeds of the goods are credited in the account. The amount of ‘mark-up’ is credited to the Departmental Mark up Account. If the selling price of any goods is reduced below its normal selling price, the reduction ‘marked down’ is adjusted both in the Stock Account and the Departmental ‘Mark up’ Account. The rate of ‘Mark up’ for Khadi Department is 33-1/3% of the cost and for Silks Department it is 50% of the cost. The following figures have been taken from the books for the year ended December 31, 20X1: Khadi Deptt. _Silks Deptt. z z Stock as on January Ist at cost 10,500 18,600 Purchases 75,900 93,400 Sales 95,600 1,25,000 © The Institute of Chartered Accountants of India(1) The stock of Khadi on January 1, 20X1 included goods the selling price of which had been marked down by @ 1,260. These goods were sold during the year at the reduced prices. (2) Certain stock of the value of *6,900 purchased for the Khadi Department were later in the year transferred to the Silks department and sold for @ 10,350. As a result, though cost of the goods is included in the Khadi Department the sale proceeds have been credited to the Silks Department. (3) During the year 20X1 to promote sales the goods were marked down as follows: Cost Marked down z z Khadi 5,600 360 Silk 10,000 2,000 All the goods that were marked down were sold except those with Silks of the value worth ¢ 5,000 (that were marked down by 1,000). (4) At the time of stock-taking on December 31, 20X1 it was discovered that Khadi cloth of the cost of 7390 was missing and it was decided that the amount be written off. You are required to prepare for both the departments for the year 20X1. (a) The Memorandum Stock Account; (6) The Memorandum Mark up Account; (Q) Extract of Profit and Loss Account. Solution Silk Stock Account To Balance b/d: By Sales A/c 1,25,000 Cost 18,600 By P&L A/c 1,000 Mark-up @50% 9300] 27,900 | By Balance c/d 52,350 To Purchases 93,400 © The Institute of Chartered Accountants of IndiaMark-up @50% To Khadi Deptt. (ts/f) Mark-up@50% 46,700 | 1,40,100 6,900 3,450 | 10,350 1,78,350 1,78,350 Silk Mark-up Account By Balance b/d To Profit & Loss A/c (bal fig.) 42,000 | By Silk Stock A/c To Balance c/d [1/3* of 52,350] 17,450 | By Silk Stock A/c 59,450 9,300 46,700 3,450 59,450 1/2 on cost is equal to 1/3 on sales Khadi Stock Account [To To Balance b/d: By Sales 95,600 Cost 105 Mark-up @ 33-1/3% 3500 14 By Silk Dept (ts/f) 6,900 To Purchases 75,900 Mark-up A/c @ 33: 13% 2300| 9200 Mark up @ 33-1/3% | 25,300] 1,01,200 |By Loss of stock A/c 390 Mark-up A/c @ 33 130 520 173% By P&L A/c 1,620 By Balance c/d (bf) 8,260 1,15,200 1,15,200 Khadi Mark-up Account To Stock A/c (transfer) 2,300] By Balance b/d 3,500 To Stock A/c (Loss of stock) 130) By Khadi Stock A/c 25,300 To Profit & Loss A/c ([Link]) 24,305 To Balance (1/4 of € 8,260) 2,065 28,800 28,800 © The Institute of Chartered Accountants of IndiaProfit and Loss Account (Extract) 20X1 =| 20x1 z To Khadi Stock A/c 1,620 | By Khadi Mark up A/c 24,305 To Silk Stock A/c 1,000 | By Silk Mark up A/c 42,000 SUMMARY © Aspects of Departmental Accounting () Computation of unrealised profit if inter-department transfers form part of closing stock. (ii) Preparation of departmental trading and profit and loss account. (iii) Monitoring stock movements with help of memorandum stock and mark-up accounts. * Methods of maintaining departmental accounts There are two methods of keeping departmental accounts: () When 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: (i) Dependent departments and (ji) Independent departments. * Basis of allocation of departmental expenses: [Link]. | Expenses Basis 1. | Rent, rates and taxes,| Floor area occupied by each repairs and maintenance, | department (if given) otherwise on time insurance of building basis 2. | Lighting and Heating | Consumption of energy by each expenses department 3, _| Selling expenses, Sales of each department Carriage inward/ Discount | Purchases of each department received a Wages/Salaries Time devoted to each department 6. | Maintenance of capital | Value of assets of each department assets, otherwise on time basis © The Institute of Chartered Accountants of India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: (i) Cost, (ii) Current market price, (iii) 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 or unrealized profit included therein, This is done by creating an appropriate stock reserve by debiting the combined Profit and Loss Account. © The Institute of Chartered Accountants of IndiaTEST YOUR KNOWLEDGE MCQs 1, Departmental accounting helps in (a) Evaluation of trading results of each department separately. (b) Effective planning and control on each department. (©) Both (a) and (b) 2. Selling commission expense is apportioned among departments in the proportion of (2) Average stock carried by each department. (b) Number of units sold by each department. (©) Sales of each department. 3. If Department A transfers goods to Department B at a price of 50% above cost, what will be the amount of stock reserve on unsold stock worth 29,000 of Department B? (a) 3,000. (b) 4,500. (1,500. 4. Goods and services may be charged by one department to another on (a) Market price. (b) Cost plus agreed percentage of profit. (©) Both (a) and (b) 5, Administrative expenses are apportioned among various departments on basis of (a) Time spent by employees in each department. (b) Value of assets of each department. (©) Sales of each department. © The Institute of Chartered Accountants of India10. Depreciation on assets is apportioned among various departments on basis of (a) Value of assets of each department. (b) Purchases of each department. ()__ Sales of each department. Expense of rent is apportioned among various departments on basis of (a) Sales of each department. (b) Floor area occupied by each department. (c) Either (a) or (b). When profit is added in inter-departmental transfers, unrealised profit included in the closing stock at the year end (before preparing final accounts) is eliminated by (a) Creating an appropriate stock reserve. (b) _Debiting the combined profit and loss account. (©) Both (a) and (b). If an organisation is interested in determining the separate departmental net profit, then (2) Accounts of all departments are kept in one book only. (b) Separate set of books are kept for each department. (©) Departments transfer goods to each other for further processing. M/s XYZ is a departmental Store having 2 departments A and B. M/s XYZ paid % 4,00,000/- towards interest on loan (loan taken for the business). Please advise the basis of allocation of interest expenses between the departments. (a) Allocated on basis of Sales of each department. (b) Allocated on basis of value of assets of each department. (©) Not allocated to individual department, recognized in the combined Profit and Loss account. © The Institute of Chartered Accountants of India11. Which of the following is not the one of the basis generally used by departments to make the inter-departmental transfer of goods: (a) Cost (b) Cost plus % of profit (c)_ Variable Cost 12. Which of the following expenses may not be proportioned amongst the departments using any suitable basis: (a) Carriage Inward (b) _ Profit on Sale of Investments () Labour welfare expenses Theoretical Questions 1. Explain the significance of having departmental accounts for a business entity. 2. How will you allocate the following expenses among different departments? () Rent, rates and taxes, repairs and maintenance, insurance of building. (ii) Lighting and Heating expenses (e.g. energy expenses) (iil) 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: Transfer from Department A Transfer from Department B Transfer from Department C Calculate the unrealised profit of each department and also total unrealised profit. © The Institute of Chartered Accountants of IndiaEy accournns 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 unrealized profit on departmental sales being eliminated. Departmental profits after charging Managers’ commission, but before adjustment of unrealized profit are as under: z 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: Transfer from Department X — 15,000 11,000 Transfer from Department Y 14,000 _— 12,000 Transfer from Department Z 6,000 5,000 = Find out the correct departmental Profits after charging Managers’ commission. Question 3 A firm has two departments--Sawmill and Furniture. Furniture is made with wood supplied by the Sawmill department at its usual selling price. From the following figures prepare Departmental Trading and Profit and Loss Account for the year 20X2: Opening Stock on1st January, 20X2 1,50,000 25,000 Sales 12,00,000 2,00,000 Purchases 10,00,000 7,500 Supply to Furniture Department 1,50,000 - Selling expenses 10,000 3,000 © The Institute of Chartered Accountants of IndiaWages 30,000 10,000 Stock on 31st December, 20%2 1,00,000 30,000 The value of stocks in the furniture department consist of 75 per cent wood and 25 per cent other expenses. The Sawmill Department earned Gross Profit at 15 per cent in 20X1. General expenses of the business as a whole came to % 55,000. 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 = 65,000 Purchase at cost % 2,00,000 Sales = 3,00,000 It is further ascertained that (1) Shortage of stock found in the year ending 31.03.20X2, costing = 1,000 were written off. (2) Opening stock on 01.04.20X1 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. 3) 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 (4) The departmental closing stock is to be valued at cost subject to adjustment for mark-up and mark-down. You are required to prepare: () A Departmental Trading Account for Department A for the year ended 31st March, 20X2 in the books of Head Office. (i) A Memorandum Stock Account for the year. (ii) A Memorandum Mark-up Account for the year. © The Institute of Chartered Accountants of IndiaANSWERS/ SOLUTIONS MCQs 1 (c) 2. () 3. (a) 4. () 5. (a) 6. (a) 7. (b) 8 (©) 9. (b) 10. (c) 1. 12. (b) Theoretical Questions 1. The main advantages of departmental accounting are: () Evaluation of performance; (ii) Growth potential of each department (ii) Justification of capital outlay; (iv) Judgement of efficiency and (¥) Planning and control. 2. 1. Rent, rates and taxes,|Floor area occupied by each repairs and maintenance, | department (if given) otherwise on insurance of building time basis 2. Lighting and Heating | Consumption of energy by each expenses (e.g, energy | department expenses) 3. Selling expenses Sales of each department Practical Problems 1. Calculation of unrealised profit of each department and total unrealised profit Unrealised Profit of: Department A 45,000 x 50/150] 42,000 x 20/120} = 15,000 = 7,000} 22,000} © The Institute of Chartered Accountants of IndiaDepartment B 40,000 x .25 72,000 x .15 = 10,000 = 10,800] 20,800) Department C 39,000 x 30/130) 42,000 x 40/140 = 9,000 = 12,000 21,000 63,800 2. Calculation of correct Profits Profit after charging managers’ 36,000 27,000 18,000 commission Add back: Managers’ 4,000 3.000 2,000 commission (1/9) 40,000 30,000 20,000 Less: Unrealised profit on (4,000) (4.500) (2,000) stock (Working Note) Profit before Manager's 36,000 25,500 18,000 commission Less: Commission _ for Department Manager @ 10% (3,600) (2.550) (4,800) Departmental Profits —_ after 32,400 22,950 16.200 manager's commission Working Note: Stock lying with Unrealised Profit of Department X 1/5x15,000 | 1/11*11,000 | 4,000 =3,000 =1,000 © The Institute of Chartered Accountants of IndiaDepartment Y Department Z 0.15x14,000 =2,100 1/6x6,000 =1,000 1/5x5,000 =1,000 0.20x 12,000 | 4,500 =2,400 2,000 Department Trading and Profit a1 nd Loss Account To opening | 1,50,000| 25,000 | By sales 12,00,000 | 2,00,000 stock To purchase | 10,00,000 7,500 | By transfer to| — 1,50,000 furniture dept. To wages 30,000 10,000 | By Closing stock | 1,00,000| 30,000 To transfer -| 150,000 from saw mill To gross) 2,70,000| 37,500 profit 14,50,000 | __ 2,30,000 14,50,000 | _2,30,000 To selling] 10,000 3,000 | By Gross Profit 2,70,000 | 37,500 expenses ToNet Profit | 2,60,000| 34,500 2,70,000 | _ 37,500 2,70,000 | _ 37,500 To Net Profit General Profit & Loss Account To stock reserve (WN2) 55,000 4,500 2,37,813 2,97,313 To general Expenses By Net Profit from Saw Mil 2,60,000 Furniture 34,500 By stock reserve 2,813 (opening WN-1) 2,97,313 © The Institute of Chartered Accountants of IndiaWorking Notes: 1. Calculation of Stock Reserve (opening), assuming FIFO % 25,000 x 75% wood x 15% = % 2,813 2. Calcul: ion of closing stock reserve Gross Profit Rate of Saw Mill of 20X2: % 2,70,000 / (12,00,000 + 1,50,000) x 100 = 20% % 30,000x 75% x 20% = % 4,500 4) Department Trading Account For the year ending on 31.03.20X2 in the books of Head Office To Opening Stock 65,000 | By Sales 3,00,000 To Purchases 2,00,000 | By Shortage 1,000 To Gross Profit c/d(b) | _ 58.880 | By Closing Stock | _22.880 3,23,880 3,23,880 (ii) Memorandum stock account (for Department A) (at selling price) To Balance b/d 81,250|By Profit & Loss A/c 1,000} (© 65,000 + 25% of & 65,000) (Cost of Shortage) To Purchases 2,50,000| By Memorandum 250| ® 200000 + 25% of| Departmental © 2,00,000) Mark-up A/c (Load on Shortage) (© 1,000 x 25%) By Memorandum 1,200] Departmental Mark-up A/c (Mark-down on Current Purchases) By Debtors A/c (Sales) | _3,00,000) © The Institute of Chartered Accountants of IndiaBy Memorandum 600| Departmental Mark-up JA/e(Mark Down on JOpening Stock) By Balance c/d (bf) 28,200 3,31,250 3,31,250| Memorandum Departmental Mark-up Account To Memorandum 250 | By Balance b/d 16,250 Departmental Stock A/c (© 81,250 x 25/125) (& 1,000 x 25/100) To Memorandum 1,200 | By Memorandum 50,000 Departmental Stock A/c Departmental Stock Alc To Memorandum 600 (® 2,50,000 x 25/125) Departmental Stock A/c To Gross Profit transferred | 58,880 to Profit & Loss A/c To Balance c/d [(® 28,200 + 400*) x 25/125 -% 400] | 5,320 66,250 66,250 *[& 1,200 x5,000/15,000] = * 400 Working Notes: () Calculation of Cost of Sales A | Sales as per Books 3,00,000 ‘Add; Mark-down in opening stock (given) 600 C | Add: mark-down in sales out of current Purchases & 1,200 x 10,000 /15,000) —800 © The Institute of Chartered Accountants of IndiaD | Value of sales if there was no mark-down (A+B+C) 3,01,400 E | Less: Gross Profit (25/125 of % 3,01,400) subject to Mark Down (® 600 + = 800) (60.280) F_| Cost of sales (D-E) 241.120 (ii) Calculation of Closing Stock A | Opening Stock 65,000 B | Add: Purchases 2,00,000 iS Less: Cost of Sales (2,41,120) D Less: Shortage (1.000) E__| Closing Stock (A+B- 22,880 Note: It has been assumed that mark up (given in question) is determined as a percentage of cost. © The Institute of Chartered Accountants of India