Question

J Horner is the proprietor of a shop selling paintings and ornaments. For the purposes of his financial statements he wishes the business to be divided into two departments:

Dept. A Paintings

Dept. B Ornaments

The following balances have been extracted from his nominal ledger at 31 August 2016:

	Debit	Credit
	K	K
Sales Department A		75,000
Sales Department B		50,000
Stocks Department A, 1 September 2015	1,250
Stocks Department B, 1 September 2015	1,000
Purchases Department A	51,000
Purchases Department B	38,000
Wages of sales assistants Department A	7,200
Wages of sales assistants Department B	6,800
Picture framing costs	300
General office salaries	13,200
Fire insurance – buildings	360
Lighting and heating	620
Repairs to premises	175
Internal telephone	30
Cleaning	130
Accountancy charges	1,490
General office expenses	510

Inventory at 31 August 2016 valued at:

Dept. A K1, 410

Dept. B K912

The proportion of the total floor area occupied by each department was:

Dept. A two-fifths

Dept. B three- fifths

The apportionment should be made by using the methods as follows:

Area-fire insurance, lighting and heating, repairs, telephone, cleaning; turnover-general office salaries, accountancy, general office expenses.

Required:

1. Prepare Sishwashwa’s department income statement for the year ending 31 August 2016, apportioning the costs, where necessary, to show the net profit or net loss of each department.
2. Explain the purpose of preparing a departmental Income statement

Answer 1

Answer (a)

Turnover apportionment( ratio)

For Dept A = Dept A Turnover/( Total Turnover of departments) = 3/5

For Dept B = Dept B Turnover/( Total Turnover of departments) = 2/5

Area based apportionment( ratio)

For Dept A = 2/5 (given)

  For Dept B = 3/5 ( given)

Application of apportionment

For Dept A & B; Respective expense head * respective ratio( based on area or turnover apportionment)

Sishwashwa’s department income statement for the year ending 31 August 2016
Particulars	Department A (k)	Department B (k)
Operating Revenue
Sales	75,000.00	50,000.00
Closing Inventory	1,410.00	912.00
Total	76,410.00	50,912.00
Less:
Operational Expense
Opening Inventory	1,250.00	1,000.00
Purchase	51,000.00	38,000.00
Wages of sales assistants	7,200.00	6,800.00
Picture framing cost	300.00	-
Total	59,750.00	45,800.00
Less:
General Expenses
General office salaries	7,920.00	5,280.00
Fire insurance-building	144.00	216.00
Lightning & Heating	248.00	372.00
Repairs to premises	70.00	105.00
Internal telephone	12.00	18.00
Cleaning	52.00	78.00
Accountancy Charges	894.00	596.00
General Office expenses	306.00	204.00
	9,646.00	6,869.00
Total expenditure	69,396.00	52,669.00
Net Profit / ( Loss)	7,014.00	(1,757.00)
Department A : Net profit of K7,014
Department B : Net loss of K1,757

Workings

Area based apportionment( 2:3)
Particulars	Dept A	Dept B	Total
Fire insurance	144.00	216.00	360.00
Lightning & Heating	248.00	372.00	620.00
Repairs	70.00	105.00	175.00
Telephone	12.00	18.00	30.00
Cleaning	52.00	78.00	130.00
Turnover based apportionment( 3:2)
Particulars	Dept A	Dept B	Total
General Office salaries	7,920.00	5,280.00	13,200.00
accountancy	894.00	596.00	1,490.00
general office expense	306.00	204.00	510.00

Answer (b)

Departmental income statement helps the owners to identify which unit is more profitable and which department is utilising more money. Thus department wise income statement helps the owner to control the operational activities of each department and helps to analyse the running of each department.