Departmental Accounts

Learning Objectives

After studying this chapter you should be able to:

Appreciate the utility of preparing departmental accounts;
Understand the basis for departmentalization of expenses;
Compute costs relating to different departments;
Make appropriate accounting adjustments for inter-departmental transfer of goods or
services; and
Explain the meaning of certain key terms.

Utility of Departmental Accounts

Business may have a number of departments each dealing in a different type of goods.
For example, one department may be dealing in medicines, the other may be dealing in
textiles, still another may be dealing in provisions etc. In order to ascertain the profit or
loss made by each Department, it will be advisable to prepare separately Trading and
Profit & Loss Account of each Department at the end of the accounting year.
Preparation of such Departmental Accounts is helpful to the business in the following
respects:
i. It enables the business to compare the performance of one Department
with that of another.
ii. It helps the business in formulating proper policies relating to the
expansion of the business. New profitable lines of production of trading
can be taken up while the existing lines of production or trading which are
giving a loss can be closed down.
iii. It helps in appropriate rewarding or penalizing the Department employees
on the basis of the results shown by them.

Maintenance of columnar subsidiary Books

The preparation of Departmental Trading and Profit & Loss Account requires
maintenance of proper subsidiary books having appropriate columns for different
departments. For example, if a business has three departments A, B & C, the
subsidiary books such as Purchases Book, Purchases Returns Book, Sales
Book, Sales Returns Books etc., should have separate columns for each of the
departments. Cash Book may also have columns for recording cash sales of
each of the departments separately in case the volume of cash sales is quite
large. The specimen of a Purchases Book having columns for different
Departments is given below:
 Purchases Book

Date Particulars L.F. Deptt. A Deptt. B Deptt. C Deptt. D

The same pattern of rulings may be followed in case of other subsidiary books
also.

DEPARTMENTALISATION OF EXPENSES

In order to ascertain the profit or loss made by each department, it is necessary

that each department is charged with a proper share of the various business
expenses. The following basis may be adopted for departmentalization of such
expenses:

i. Expenses incurred specifically for a particular department should be

directly charged to that department. For example, salaries payable to each
of the departmental managers will be charged to the respective
departments. Similarly if there are separate electricity metres for each of
the departments, the electricity should be charged to each of the
departments on the basis of the electricity bills received for each one of
them.
ii. Expenses which have been incurred for the business as a whole but
capable of being apportioned over different departments on a suitable
basis should be charged to the different departments, on such basis. Of
course, there are no hard and fast rules as regards the basis to be
applied for apportionment of such expenses. However, the following basis
for apportionment may be adopted:
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, E.S.I. may be apportioned on this basis.
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.
c. Floor area. Expenses such as lighting ( unless metered separately), rent and
rates, wages of night watchman etc.. may be apportioned on this basis.
d. Number of workers employed. Expenses of workers’ canteen, welfare, personnel
and time keeping departments etc.. may be apportioned on this basis.
 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.
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.

iii. Expenses which cannot be allocated or apportioned over different

departments in a reasonable manner , should be charged to the total profit
of all the departments in a reasonable manner, should be charged to the
total profit of all the departments taken together. For this purpose, the
profit shown by the different departments should be brought down in one
account which will be termed as the General Profit & Loss Account and all
such expenses should be charged there. General Manager’s salary,
Directors’ fees, Auditors’ remuneration, Interest on Debentures etc. are
some of the expenses which fall in this category.

TYPE OF PROBLEMS

The examination problems relating to departmental accounts can be put in the

following categories:

1. Problems relating to Departmentalisation of Expenses

2. Problems relating to Computation of Departmental Costs
3. Problems relating to Inter-departmental Transfers:
a. When such transfers are at cost
b. When such transfers are at a price higher than the cost.
Exhaustive illustrations have been given in the following pages in respect of each
of these types of problems.

Departmentalisation of Expenses
 Illustration 7.1 M/s Raju Auto Garage have three departments, viz. (i)_ Cars and
Trucks, ( ii) Two wheelers, and (iii) Servicing. The former two sell spare parts and
occupy a godown-cum-showroom. The servicing department uses a garage and
adjoining site.

The following particulars are extracted from the books of the business for the
year ended 31st March, `1989, from which you are required to prepare :

a. A Departmental Trading and Profit and loss Account,

b. A General Profit and Loss Account, and
c. A Balance Sheet

Stock 1.4.88 Rs.

Cars and Trucks 1,00,000
Two-wheelers 27,500

Purchases:

Cars and Trucks 3,50,000

Two-wheelers 1,10,000

Sales:
Cars and Trucks 6,00,000
Two-Wheelers 3,00,000
Servicing 1,00,000
Wages of counter-salesmen:
Cars and Trucks 30,000
Two-Wheelers 12,000
Wages of garage labour 10,800
Office salaries and wages 12,000
Godown and showroom rent 24, 000
Land and Garage Building 2,72,000
Office Expenses 36,000
Garage Equipment 1,00,000
Showroom Furniture and Fittings 70,000
Office Van 24,000
Sundry Debtors 12,000
Sundry Creditors 60,000
Bank Overdraft 17,200
Power and Lighting 36,000
Bank Interest 1,000
Cash in hand 900
Drawings Account 12,000
Proprietor’s Capital Account 1,63,000

Following further information is available:

i. Included in “ Land and Garage Building “ is cost of site used by the

servicing department Rs.2,00,000.
ii. Closing stock on 31.3.1989 at the departments:
Rs.
Cars and Trucks 90,000
Two-wheelers 32,500

iii. 50% of power and lighting is to be charged to Servicing

Department, the balance equally to the other departments.
iv. Rates for depreciation are:
Building 5% ; Garage Equipment 15%, Showroom furniture etc.
10% and Office Van 20%
v. Outstanding expenses were:
Rs.
Interest 150
Office expenses 2,000
 vi. Interest and all expenses relating to the office are to considered
common and charged to the General Profit and Loss A/c.
vii. The departments using the showroom share the space and
furniture and fittings equally.

(C.A. Entrance, Nov. 1979, adapted)

(For Solution please see page 2.240 and below)