Question

Each Apple retail store has several departments. Why is it useful for its management to (a) collect accounting information about each department and (b) treat each department as a profit center?

Answer 1

Benefits of colleting Accounting Information about each department:

1. The information supports assessment/ evaluation of performance/ profitability/ financial results etc. of each departments seperately. This also supports certain decisions like whether transactions like purchases/ sales of any department should be made internally from/ to another department or from/to an external buyer/ seller. Further, identification of the profitable divisions also gives a direction as to which are the departments the management should concentrate and try to increase the sales to maximise overall profitablility of the organisation.

2. Growth potential of each department, as compared to other departments can be evaluated which supports the management in taking decision for future business plans.

3. Departmental accounting helps the management to evaluate whether the assets employed in a particular department earns required return on assets. This also helps in investing decisions as to identification of which are the departments, the management can increase its investment in assets and where the management needs to reallocate the assets.

4. various operating ratios can be computed for each of the departments seperately which measures the efficiencies of each of the departments.

5. Effective planning and control can be achieved on the basis of seperate accounting information for each department.

Benefits of treating each department as a profit center:

Treating each department as a seperate profit center allows maintenance of accounting information about each department in a cost-effective and with very low efforts in any ERP system. The ERP system allows every entries of revenue and expenditure to be identified with the relevant profit center by capturing this information at the time of recording each voucher/ entries. Thus, this enables the infiormation regarding revenue, expenditure, profits and numerous customised/ standard reports to be generated for each of the department/ department wise comparisons and other useful information for the management for planning, control and other decisions. It may also be noted that even the assets and liabilities of a particular department can be identified seperately for each of the department.