Learn to Use Department Accounting

Department accounting or departmental accounting  is a system of financial accounting which is used in the organizations whose all works are done through their different departments or departmental stores. We maintain the record each department. By recording  the expenses and incomes of different departments, it is easy to track profit or loss of each department. To calculate the profit or loss from each department is the aim of adopting departmental accounting system. It has two benefits:

1. We can find the net loss or profit from each department. We can also show it in %. This figure is very helpful to promote any department or stop it.

2. On previous financial reports of departments, we can take the decision of inter- department transfer of stock and other machinery for getting better return on our investment.

Departmental Trading and Profit and Loss Account 


Expenses

A Dept.

B Dept.
                                                      
Incomes 

A Dept.

B Dept.
1.Opening stock
2.purchase
3.direct expenses


Gross profit
Sales


Closing Stock

Operating
Expenses


Net Profit transferred to General Profit and Loss account
(Balancing figure)
Gross profit






Departmental trading and profit and loss account is the main account in department accounting which will be different normal trading and profit and loss account. This account is made in column form. Each column will show the figure of department expenses and incomes. Profit or loss from this account will transfer to normal profit and loss account.


For making this account in department accounting, we have to follow following procedure.

1. Allocation of Expenses among the Departments 

S.No.  Name of Expenses
Basis of Allocation of
Expense
1 Salaries and depreciation of machines To allocate on basis of the direct identification. If machine in B department, calculate its depreciation and charge on B department. Calculate salary or wages of each department and add in its column of expenses. 
2. Electricity On the basis of Unit consumed by each department. This can be calculated by sub- meter.
3. Building Expenses These expenses can be calculated on the basis of area of each department. If total building expenses are $ 100, then B department's proportion will be 100 X area of b/ total area
4. Selling Expenses These expenses are allocated on the basis of sales of each department.
5. Labor Welfare Expenses These expenses are allocated on the basis of number of workers in each department.
6. Lighting Expenses These expenses can be allocated on the basis of number of points in each department.
7. Insurance of Stock Cost of insurance premium can be allocated on the basis of average stock in each department.

2. Calculation of Departmental Purchase

In the question, if the information of purchase price is not given for bought stock for different department. We can calculate this missing figure from sales ratio.

Formula of Purchase of any department = Purchase quantity of dept. X sale price of dept. / Total of purchase quantity of dept. @ sale price. X total purchase cost

for example :

If purchase of x, y and z departments are 200 units, 1400 units and 400 units and total purchase cost is $ 5100. If sale price per unit in x, y and z are $ 15 per unit, $ 18 per unit and $ 6 per unit, then we first calculate sale price rate of each department and it will be 15: 18 : 6 or 5 : 6: 2

Now we calculate proportion for calculating purchase cost of each department

X = 200 X 5 = 1000
Y = 1400 X 6 = 8400
Z = 400 X 2 = 800
----------------------------
Total amount = 10200
======================

Department  X's total purchase cost = 1000/10200 X 5100 = 500
Department Y's Total purchase cost = 8400/10200 X 5100 = 4200
Department Z's total purchase cost = 800/10200 X 5100 = 400

  Unit cost of X department = 500 / 200 = $ 2.5
Unit cost of y department = 4200/1400= $ 3
Unit cost of z department = 400/400= $ 1

3. Inter Departmental Transfer - At Cost

Inter departmental transfer means to transfer stock of one department to other department. If the transfer of stock from one department to other department is  at cost price, we will debit the receiving department with stock's cost price and credit to the giving department the stock at cost price. In simple, we will show the cost of getting stock in the debit side of trading account of receiver department. We will show the cost of giving stock in the credit side of trading account of giver department. Or we can show purchase internal in trading account of receiving department and sale internal in trading account of giving department.

4. Inter Departmental Transfer - At Sale Price

When stock is transfer at the sale price, at that time, giver department gets some profit margin but receiving department has no right to increase prices, sale price or profit. If all the transfer stock is sold in end of year, there is no need to show any adjustment. But, if there is any unsold stock of transfer goods, we have to deduct the amount of profit because this stock is our current asset and we can not show it at sale price. For showing our stock at cost, we have to adjust creating the provision of inter transfer of department account. We will debit this account in the general profit and loss with profit on unsold transfer stock.

How to Calculate the Provision on Unsold Closing stock of internal transfer? 1. To calculate the amount of transfer stock in unsold stock at the end of year.

2. Calculate its profit margin by multiply transfer unsold goods with
profit rate

In following general profit and loss account, we show provision for inter-transfer department. With this, our profit will be normal.

Dr. Amt. in $                           
                        
                       Cr.
Amt. in $
Provision for inter-
transfer dept. account
20% on unsold transfer at sale price 10000
Net Profit (B.F.)
2000


23000
Net Profit of A and B
department
25000
25000 25000

Related : Voyage Accounting

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Accounting Education: Learn to Use Department Accounting
Learn to Use Department Accounting
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Accounting Education
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