Question

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

Please explain in word format only and in 350 words. Please dont copy paste from websites.

Thanks

Answer 1

A Departmental Income Statement shows each departments contribution margin and net income from operating, after all expenses are allocated for. The Departmental Income Statement shows which departments of the company are the most profitable, and which departments are costing the company money. The Departmental Income Statement helps managers and owners evaluate and control the operations of each department. This is important for running a top quality company. The profitable departments can be expanded to make more profits if they are currently making a profit.The departments that are causing the company to lose money or not gaining enough profits may be cut back, or shut down.he decisions to retain, eliminate, or expand a department or the business, are based on the results from the contribution margin of the department or product. Without having the Departmental Income Statement it would be harder for the company to figure out where the profits and losses are coming from.

Division of income & cost across departments

Direct costs - the ones that are obviously related to a certain product or department are easy to allocate. But the shared or indirect ones, such as the costs of a company cafeteria, office supplies and human resources, are less straightforward. These indirect, shared expenses can be allocated in several ways.

1. Number of Staff

Shared, indirect costs often are divided between company departments based on the number of employees in each department. For example, the cost of a company cafeteria could be allocated to departments in proportion to the number of employees in each department, because they all may be assumed to use it, suggests the Principles of Accounting website. The overall cost of office supplies could be allocated to departments based on the number of employees in each one.

2. Square Footage

Expenses often are allocated on the basis of square footage in each department. For example, janitorial services might be allocated among office departments or divisions on a square-footage basis. Expenses such as rent and utilities in a manufacturing plant or office could be allocated based on how much space is used in each department.

3. Labor Hours

The cost of a particular product, service or company program can be allocated based on the number of labor hours used to produce it. The cost of a certain model of car, for example, could be allocated based in part on the labor hours used to produce it. The cost of a program could be allocated among departments based on the number of labor hours each department puts into its implementation.