Question

Explain the procedure for construction of departmental income statement in an enterprise in which several separate departments function. Provide an example of a departmental income statement in which at least three shared indirect costs are divided according to three different appropriate allocation bases. Explain your example 

Answer 1

The steps required for arriving at departmental income statement is as follows -

1. Assignment of direct costs - the direct costs are directly related to the department hence does not require any allocation but are directly assigned to the respective department

2. Allocation of indirect costs- certain Costs may be incurred for all the departments hence may need allocation based on some factor e.g. rental of the office housing all the departments may be allocated basis area occupied by each department

3. Allocation of service department cost - since service departments may also spend their time for servicing all departments , their cost may Lso need to be allocated

3 examples are given below

Type	Basis	nature
Material	Direct cost hence allocation not required	direct costs
Electricity	Factor based on no of employees or sq ft area used or electrical points etc.	Indirect costs
Finance function cost	Factor based on hours spent by finance team for each department	Service departments costs