ACU 07205 & ACU 07210

Departmental accounting
 What is department?
Is a division or unit established
by the parent organization to
achieve a common and specified
operational functions. Each
department is individually
responsible to its profit or loss.
What is departmental accounting?
Departmental accounts are set of
accounts prepared to measure each
department or division’s operational
performance and trading results.
These are prepared at any given time
to measure the earning capacity and
find the operational leakage.
 Purpose or Objectives of
departmental accounting
To assess each department on the basis of
operational performance.
To keep separate set of accounts of each
department to monitor the trend of
performance.
To take special care of weak department
to improve the performance.
 Purpose or Objectives of
departmental accounting….
To decide the further investment or disinvestment of
the fund among the different departments based on
the outcome of the performance assessment
To check out interdepartmental performance
To evaluate the performance of the department with
previous period result.
 Purpose or Objectives of
departmental accounting….
To help the owner for formulating right policy for
future.
To assist the management for making decision to
drop or add a department
To provide detail information of the entire
organization
To assist management for cost control
 Advantages of departmental
accounting
It helps to make sure whether the department
makes profit or suffers a loss.
 It makes the management to compare the
departments each other to take corrective
actions.
 It helps to take a decision of further
investment or disinvestment based on the
results of each department.
 Advantages of departmental
accounting…
 It helps to reward the manager of each department
with incentives and remuneration.
The trading results of each department may help to
evaluation the performance of each department. The
sales of that department which gives maximum profit
may be pushed up by special efforts.
The profitability of each department may help the
management for taking decision whether to drop a
department or add a new one.
 Advantages of departmental
accounting ….
 The growth potentials of a department can be evaluation by
having comparison with the other departments.
 The users of accounting information can be provided more
detailed information like the shareholders, investors,
creditors, etc.
 The overall profits of the organization can be increased by
having friendly rivalries between different departments.
 The departmental managers and staff can be suitably
rewarded on the basis of the departmental result.
 Advantages of departmental
accounting …
 Ithelps the management to determine the
justification of proper use of capital
invested in each department.
 It helps to have comparison of various
expenses of each department with the
previous period or with other departments
of the same concern.
 Advantages of departmental
accounting …
It helps to know the efficiency of each
department by calculating stock turnover ratio
of each department to reveal the fast or slow
movement of various items of stock.
 The information provided by departmental
accounts may be helpful to the management for
future intelligent planning and control.
Methods of departmental accounts
There are two methods of keeping
Departmental Accounts −
Separate Set of Books for each
department or Singular method
Accounting in Columnar Books
form or Columnar method
 Methods of departmental accounts
…
Independent method / Singular method /
Unitary method of departmental accounts
Under this method of accounting treatment,
each department is treated like a separate
establishments and a separate set of accounts
are maintained to each department to find out
trade efficiency.
 Methods of departmental accounts
…
Columnar method of departmental
accounts
It is said to be a consolidation
method. Under this method of
accounting treatment, common books
of accounts are maintained for all the
departments or division of the
establishment.
 Why do we prepare departmental
trading account?
This account is similar to
common trading account. It is
prepared to find out the Gross
Profit or loss of respective
departments.
 Basis for apportionment of Cost to
Departments
The following are common basis for
apportionment of Expenses/Costs to
departments:
(a)Departmental wages.
Expenses which directly vary with the
department wages can be apportioned on
this basis. For example, premium for
workmen’s compensation, insurance, may
be apportioned on this basis
 Basis for apportionment of Cost to
Departments…
(b)Capital value of the assets.
Expenses such as depreciation of
buildings, plants and machinery,
fire insurance premiums in respect
of these assets etc., may be
apportioned on this basis
 Basis for apportionment of Cost to
Departments…
(c) Floor area.
Expenses such as lighting (unless
metered separately), rent and rates,
wages of night watchman etc.. may be
apportioned on this basis.
 Basis for apportionment of Cost to
Departments…
(d)Number of workers employed.
Expenses of workers’ canteen,
welfare, personnel and time keeping
departments etc.. may be apportioned
on this basis.
 Basis for apportionment of Cost to
Departments…
(e) Production hours of direct labour.
Works manager’s remuneration, general
over- time expenses , cost of inter-departmental
transport should be charged to the various
departments in the ratio which the
Departmental Direct Labour Hours bear to the
Total Factory Direct Labour Hours.
 Basis for apportionment of Cost to
Departments…
(f) Technical estimate.
Advice of the technical personnel may
also be useful for the apportionment of
certain expenses , eg., the cost of steam
consumed by a particular department, may
be estimated on the basis of the engineers’
estimate.
 Basis for apportionment of Cost to
Departments…
Some expenses, which are specially
incurred for a particular department may
be charged directly to the respective
department. For example, hiring charges
of the transport for delivery of goods to
customer may be charged to the selling
and distribution department.
Basis for apportionment of Cost
to Departments…
Some of the expenses may be
allocated according to their uses.
For example, electricity expenses
may be divided according to the sub
meter of each department.
Basis for apportionment of Cost
to Departments…
Following are the examples of some expenses, which
are not directly related to any particular department may
be divide as
Cartage Freight Inward Account − may be divided
according to purchase of each department.
Depreciation − Depreciation may be divided
according to the value of assets employed in each
department.
Basis for apportionment of Cost
to Departments…
 Repairs and Renewal Charges − Repair and renewal of the
assets may be divided according to the value of the assets
used by each department.
 Managerial Salary − Managerial salary should be divided
according to the time spent by the manager in each
department.
 Building Repair, Rents & Taxes, Building Insurance,
etc. − All the expenses related to the building should be
divided according to the floor space occupied by each
department.
Basis for apportionment of Cost
to Departments…
Selling and Distribution Expenses − All the
expenses relating to selling and distribution
expenses should be divided according to the
sales of each department, such as freight
outward, travelling expenses of sales
personals, salary and commission paid to
salesmen, after sales services expenses,
discount and bad debts, etc.
Basis for apportionment of Cost
to Departments…
 Insurance of Plant & Machinery − The value of such Plant &
Machinery in each department is the basis of the insurance.
 Employee/worker Insurance − Charges of a group insurance
should be divided according to the direct wage expenses of
each department.
 Power & Fuel − Power & fuel will be allocated according to
the working hours and power of the machine (i.e. Hours
worked x Horse power).
 Inter-Department Transfer

An inter-department analysis sheet is

prepared at a regular interval such as weekly
or monthly basis to record all the inter-
departmental transfers of goods and services.
It is necessary, as each department is working
as a separate profit center. Transfer of the
prices of such transactions can be cost base,
market price, or duel basis.
 Inter-Department Transfer Price
There are three types of transfer prices −
 Cost based transfer price − Where the transfer price is based on
standard, actual, or total cost, or marginal cost is called cost based
transfer price.
 Market based transfer price − Where the goods are transferred at
selling price from one department to another is known as market based
price. Therefore, unrealized profit on the goods sold is debited from the
selling department in the form of a stock reserve for both the opening
and the closing stock.
 Dual pricing system − Under this system, the goods are transferred on
the selling price by the transferor department and booked at the cost
price by the transferee department.
Thank you