Question

Please explain what is departmental income statement and how income costs are divided across the departments.

PLEASE ANSWER IN WORD FORMAT ONLY. AND IN 350 WORDS.

Thanks

Answer 1

Departmental income statement;

Departmental income statement is a specific type of income statement which is prepared by a company to know actual profitability or actual loss of each department operating inside the company. As we know that a company may be operating at profits but some departments may operate at losses hence to know actual condition of the each department, company needs to make departmental income statement.

In other words we can say that when income statement is prepared on the basis of each department incomes & costs then such income statement is known as departmental income statement.

Departmental income statement is prepared on the basis of associated incomes of the department and associated direct costs of the department to know contribution margin of each department. Apart from this indirect costs are allocated to each departments to know actual income or loss for the each department.

How income & costs are divided across the departments?

Incomes are divided on the basis of relevant contribution in the overall income of a company. Sometime it is given that each department contribute some specified percentage in the company hence total income is distributed & divided among various departments. For example; a company may consist of following departments;

·        Dining

·        Catering

·        Beverage etc.

Thus incomes and direct costs will be directly traced to each department without any allocation base because incomes and direct costs are directly attributable to each department. In other words we can say that sales made by each department will be recognized as income to each department and associated direct costs will be easily traceable to each department.

But indirect costs will be allocated on the basis of a suitable & perfect allocation base. Such allocation base may be used by a company on the basis of available conditions of the company. Such allocation may be as follow;

1. Wages & salaries may be divided on the basis of hours worked in the departments.

2. Rent and related expenses may be divided on the basis of floor area occupied.

3. Advertsing expenses may be divided on the basis of sales volume.

4. Equipment depreciation on the basis of hours used of equipment.

5. Utilities expenses on the basis of floor area occupied.

6. Office expesnes on the basis of number of employees employed in each department.

7. Purchasing costs on the basis of volume purchased by each department.

8. Other indirect machine costs on the basis of direct labor hours etc.