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DEPARTMENTAL ACCOUNTS
Introduction :
Departmental Accounts helps in identifying the performance of each department. Each
department is considered to be an Activity Centre. It is a tool which helps management in
decision-making.
Departmentation offers the following advantages —
a. Proper Allocation : Expenses that relate to a particular department are estimated on an
exact basis. Hence, cost and profits of each department is estimated more accurately.
b. Control : Availability of separate cost and profit figures for each department facilitates
control. Proper control and fixation of responsibility is easier.
c. Proper absorption : The processing times of different products in different departments
may vary. Specific cost analysis on a department-wise basis facilitates scientific cost
absorption and cost assignment. This provides the right platform for product- pricing
decisions also.
Bases of Appointment of Expenses :
Nature of Expense Treatment Examples
Specific Charge When a certain expense is • Depreciation of machinery on
specifically incurred for one value of machinery;
department, it should be charged • Insurance on stock on the value
in full to that department only. of stock.
Shared Common When benefits of certain expenses • Rent is apportioned based on
Expenses are expenses shared by all Floor Space occupied by each
departments and are capable of department.
precise allocation, they should • Lighting Expenses is
be apportioned to all depart- apportioned basis of on the
ments on an appropriate and number of light points (or) on the
equitable basis. basis of floor area.
• Canteen subsidy on the basis of
No. of workers.
General Expenses Common expenses which are not • Administration Expenses like
capable of accurate Office Salaries may be
apportionment to various apportioned equally among all
departments are dealt with departments or alternatively
judiciously, based on facts and debited to General P&L Account.
circumstances of each case. • Selling and Distribution
Expenses may be apportioned
based on Sales ratio.
Inter-Departmental Transfer :
1. Methods of Transfer Pricing : Transfers made by one department to another may be
recorded either at (a) Cost or (b) Market Price or (c) any other appropriate method e.g.
Cost + Agreed Profit Mark Up.
2. Accounting : When transfers are made, their value should be credited as Income of the
Transferring Department and debited as cost of the Recipient Department. When profit is
added in the inter-departmental transfers, the loading (unrealised profit) included in the
Closing Stock should be reversed, by debiting the General P&L Account and crediting
Stock Reserve Account.
Illustrations 1 :
Snow White Ltd has two departments — Cloth and Readymade Clothes. Ready Made Clothes
are made by the Firm itself out of cloth supplied by the Cloth Department at its usual selling
price. From the following figures, prepare Departmental Trading and Profit and Loss Accounts
for the year ended 31st March :
Particulars Cloth Dept Readymade Clothes
st
Opening Stock on 1 April 3,00,000 50,000
Purchases 20,00,000 15,000
Sales 22,00,000 4,50,000
Transfer to Readymade Clothes Department 3,00,000 —
Expenses - Manufacturing — 60,000
Selling 20,000 6,000
Closing Stock on 31st March 2,00,000 60,000
The Stock in the Readymade Clothes Department may be considered as consisting of 75%
Cloth and 25% other expenses. The Cloth Department earned Gross Profit at the rate of 15%
during the year. General Expenses of the business as a whole came to Rs.1,10,000.
Solution :
Departmental Trading and Profit and Loss A/c for the year ending 31st March (Rs.)
Particulars Cloth RM Total Particulars Cloth RM Total
To Opg. Stock 3,00,000 50,000 3,50,000 By Sales 22,00,000 4,50,000 26,50,000
To Purchases 20,00,000 15,000 20,15,000 By Tfr. to 3,00,000 — 3,00,000
RM
To Tfr from — 3, 00,000 3,00,000 By Closing 2,00,000 60,000 2,60,000
Cloth Dept. Stock
To Mfg. Exps. 60,000 60,000
To Gross Profit 4, 00,000 85,000 4,85,000
Total 27,00,000 5,10,000 32,10,000 Total 27,00,000 5,10,000 32,10,000
To Selling Exp. 20,000 6,000 26,000 By Gross 4,00,000 85,000 4,85,000
Profit
To Profit c/d 3,80,000 79,000 4,59,000
Total 4,00,000 85,000 4,85,000 Total 4,00,000 85,000 4,85,000
To Gen. Exp. 1,10,000 By Profit b/d 4,59,000
To Stock Reserve 1,575
(See Note below)
To Net profit 3,47,425
Total 4,59,000 Total 4,59,000
Note 1 : Stock Reserve to be additionally provided is 7,200 – 5,625 = Rs. 1,575; calculated as
under :
Prepare Departmental Accounts for each of the three Departments A, B and C mentioned
above after taking into consideration the following :
(a) Transistors and Tape Recorders are sold at the Showroom. Servicing and Repairs are carried
out at the Workshop.
(b) Salaries and wages comprise as follows: Showroom 3/4th and Workshop 1/4th
It was decided to allocate the Showroom Salaries and Wages in ratio 1:2 between
Departments A and B.
(c) Workshop Rent is Rs.500 per month. Showroom Rent is to be divided equally between
Departments A and B.
(d) Sundry Expenses are to be allocated on the basis of the turnover of each Department.
Solution :
Departmental P&L Accounts for the year ending 31st March (Amount in Rs.)
Particulars A B C Particulars A B C
To Purchases 1,60,000 1,25,000 By Sales 1,75,000 1,40,000
To Spares 80,000 By Services 35,000
To Sal. & Wages 12,000 24,000 12,000 By Closing Stock 60,100 20,300 44,600
To Rent 2,400 2,400 6,000 By Net Loss 19,500
To Sundry Exps.* 5,500 4,400 1,100
To Net Profit 55,200 4,500
Total 2,35,100 1,60,300 99,100 Total 2,35,100 1,60,300 99,100
Note : Sundry Expenses are apportioned in the ratio of Turnover (5: 4: 1) i.e. 1,75,000: 1,40,000:
35,000.
Illustration 3 :
Samudra & Co, a Partnership Firm has three departments viz. K, L, M which are under the
charge of the Partners B, C and D respectively. The following Consolidated P&L Account is
given below :
Particulars Rs. Particulars Rs.
To Opening Stocks (Notel) 81,890 By Sales (Note 7) 4,00,000
To Purchases (Note 2) 2,65,700 By Closing Stocks (Note 8) 89,000
To Salaries and Wages (Note 3) 48,000 By Discounts Received (Note10) 600
To Rent Expenses (Note 4) 10,800
To Selling Expenses (Note 5) 14,400
To Discount Allowed (Note 5) 1,200
To Depreciation (Note 6) 750
To Net Profit for the year 67,060
Total 4,89,800 Total 4,89,800
From the above Account and the following additional information, prepare the Departmental
P&L Accounts for the year ended 31st March -
1. Break up of Opening Stock Department wise is: K - Rs.37,890; L - Rs.24,000 and M - Rs.20,000.
2. Total Purchases were as under: K - Rs.1,40,700; L - Rs.80,600; M - Rs.44,400.
3. Salaries and Wages include Rs. 12,000 wages of Department M. The balance Salaries should
be apportioned to the three departments as 4:4:1.
4. Rent is to be apportioned in the ratio of floor space which is as 2:2:5.
5. Selling Expenses and Discount Allowed are to be apportioned in the ratio of Turnover.
6. Depreciation on assets should be equally charged to the three departments.
7. Sales made by the three departments were: K - Rs.1,80,000; L - Rs.1,30,000 and M - Rs.90,000.
8. Break up of Closing Stock Department wise is: K - 45,100; L - Rs.22,300 and M - Rs.21,600.
The Closing Stock of Department M includes Rs.5,700 goods transferred from Department
K. However, Opening Stock does not include any goods transferred from other departments.
9. Departments K and L sold goods worth Rs.10,700 and Rs.600 respectively to Department
M.
Illustration 4 :
Anand Ltd, has 3 departments X, Y and Z The following information is provided:
Particulars X Y Z
Opening Stock 3,000 4,000 6,000
Consumption of direct materials 8,000 12,000 —
Wages 5,000 10,000 —
Closing Stock 4,000 14,000 8,000
Sales — — 34,000
Stocks of each Department are valued at cost to the Department concerned. Stocks of X are
transferred to Y at a margin of 50% above Department cost. Stocks of Y are transferred to Z at a
margin of 10% above departmental cost.
Other expenses were :
Salaries 2,000
Printing and Stationery 1,000
Rent 6,000
Interest paid 4,000
Depreciation 3,000
Allocate expenses in the ratio of Departmental Gross Profits. Opening figures of reserves for
unrealised profits on departmental stocks were: Department Y-Rs.1,000; Department Z-Rs.2,000.
Prepare Departmental Trading and Profit and Loss Account for the year.
Solution :
1. Departmental Trading Account for the year (Rs.)
Particulars X Y Z Total Particulars X Y Z Total
To Opening Stock 3,000 4,000 6,000 13,000 By Internal 18,000 33,000 — 51,000
Transfer
To Direct Material 8,000 12,000 — 20,000 By Sales — — 34,000 34,000
To Wages 5,000 10,000 — 15,000 By Closing 4,000 14,000 8,000 26,000
Stock
To Intl. Transfer —8,000 33,000 51,000
To Gross Profit 6,000 3,000 3,000 12,000
Total 22,000 47,000 42,000 1,11,000 Total 22,000 47,000 42,000 1,11,000
Solution :
1. Departmental Trading, Profit & Loss Account for the year ended 31st March
Particulars M S Particulars M S
To Opening Stock 20,000 12,000 By Sales 140,000 112,000
To Purchases 92,000 68,000 By Transfer:
Purchased Goods 8,000 10,000
Finished Goods 35,000 40,000
To Transfer : By Closing Stock
Purchased Goods 10,000 8,000 Purchased Goods 4,500 6,000
Finished Goods 40,000 35,000 Finished Goods 24,000 14,000
To Wages 12,000 8,000 By Return of 10,000 7,000
To Carriage Inwards 2,000 2,000 Finished Goods
To Return of Finished Goods 7,000 10,000
To Gross Profit 38,500 46,000
Total 221,500 189,000 Total 221,500 189,000
Illustration 7 :
Department X sells goods to Department Y at a profit of 25% on cost & to Department Z at a
profit of 10% on cost. Department Y sells goods to X & Z at a profit of 15% & 20% sales,
respectively. Department Z charges 20% & 25% profit on cost to Department X & Y, respectively.
Department Managers are entitled to 10% Commission on Net Profit subject to Unrealised
Profits on Departmental sales being eliminated.
Departmental profits after charging manager’s commission, bur before adjustment of
unrealised profits are : X = Rs. 36,000; Y = Rs. 27,000; Z = Rs. 18,000
Stocks lying at different departments at the year end are as under :
Particulars X Y Z
Transfer from Department X — 15,000 11,000
Transfer from Department Y 14,000 — 12,000
Transfer from Department Z 6,000 5,000 —
Find out the correct Departmental Profits after charging Managers’ Commission.
Solution :
1. Computation of Unrealised Profits
Particulars of transfer to Department X Department Y Department Z Total
From Department X to Y and Z 15,000 × 25/125 11,000 × 10/110
at 25% and 10% of Cost Nil =3,000 =1,000 4,000
From Department Y to X and Z 14,000 × 15/100 12,000 × 20/100
at 15% and 20% of Sales =2,100 Nil =2,400 4,500
From Department Z to X and Y 6,000×20/120 5,000×25/125
at 20% and 25% of Cost =1,000 =1,000 Nil 2,000
Opening and Closing Stocks are valued at Cost as indicated in WN 3 above. Sale Amount in
the Trading Account is computed for the Sale Quantity only. Gross Profit is calculated at 20%
of Sale Value.
Illustration 9 :
Anumod Ltd. is a retail store having 2 Departments P and Q. The Company maintains at
Memorandum Stock Account & Memorandum Mark Up Account for each of the Departments.
Supplies issued to the Departments are debited to the Memorandum Stock Account of the
Department at Cost plus Mark Up, and Departmental Sales are credited to this Account. The
Mark Up on supplies issued to the Departments is credited to the Mark Up Account for the
Department. When it is necessary to reduce the Selling Price below the Normal Selling Price,
i.e. Cost plus Mark Up, the reduction (Mark Down) is entered in the Memorandum Stock
Account & Mark Up Account. Department P has a mark up of 33-1/3% on Cost, and Department
Q has a mark-up of 50% on cost.
The following information has been extracted from the records of the Company for a year
ending 31st December.
Particulars P Q
Opening Stock (at Cost) 24,000 36,000
Purchases 162,000 190,000
Sales 210,000 285,000
1. Opening Stock of Department P includes goods on which the Selling Price has been marked
down by Rs.510. These goods were sold in January at the reduced Selling Price.
2. Certain goods purchased during the year for Rs.2,700 for Department P, were transferred
during the year to Department Q & sold for Rs.4,500. Purchases & Sales are recorded in the
Purchases of Department P & the Sales of Department Q respectively, but no entries have
been made in respect of the transfer.
Solution :
1. Memorandum Stock Account (in Rs.)
Particulars P Q Particulars P Q
To balance b/d (givgn cost 32,000 54,000 By balance b/d (mark 510
+ 33-1/3% & 50% m-up) down - given)
To Purchases (given) 162,000 190,000 By Sales (given) 210,000 285,000
To Memorandum Mark Up 54,000 95,000 By Internal 2,700 —
(33-1/3% & 50% on pure.) Transfer -per contra
To Internal Transfer - per — 2,700 By Memorandum Mark 900
contra Up (M-up on Transfer)
To Memorandum Mark Up — 1,350 By Memorandum Mark 800 4,100
(50% on Internal Tfr) Up (Mark Down - given)
To Memorandum Mark Up — 344 By Abnormal Loss-Cost 240 —
(on Marked Down Goods transferred to P & L A/c
still in stock - See Note 1)
By Memorandum Mark 80
Up ( M-up on Stock Lost)
By balance c/d (Closing 32,770 54,294
Stock - balancing figure)
Total 248,000 343,394 Total 248.000 343,394
* Value of Mark Down Goods = Cost Add: Normal Mark Up 50% Less: Amount Marked
Down
= Rs.21,000 Add: Rs. 10,500 Less: Rs.4,100 (given) = Rs.27,400
2. Trading Account for the year ended 31st December (in Rs.)
Particulars P Q Particulars P Q
To Opening Stock 24,000 36,000 By Sales 210,000 285,000
To Purchases 162,000 190,000 By Internal Transfer 2,700 —
To Internal Transfer — 2,700 By Abnormal Loss 240 —
To Gross Profit 51,518 92,496 By Closing Stock (Note 2) 24,578 36,196
Total 237,518 321,196 Total 237,518 321,196
Working Notes :
(i) FIFO method for stock issue has been assumed. Alternatively this question could have
been solved by assuming other methods for stock issue like LIFO Basis, Weighted
Average basis, etc.
Out of the total transfer by X Department, 30 units were transferred to selling department,
while the reamining to Department Y. The per unit material and labout consumption in X
Department on production to be transferred directly to selling department is 300 per cent of the
labour and material consumption on units transferred to Y Department. General Administration
expenses Rs. 80,000.
Required : Prepare Departmental Profit and Loss Account and General Profit and Loss
Account for the year ended 31.3.2008.
Solution :
Departmental Profit and Loss Account
Dr. for the year ended 31st March, 2008 Cr.
X Dept. Y Dept. Selling Dept. X Dept. Y Dept. Sell Dept.
Particulars Qty. Rs. Qty. Rs. Qty. Rs. Particulars Qty. Rs. Qty. Rs. Qty. Rs.
200 4,18,000 150 3,50,000 180 6,60,000 200 4,18,000 150 3,50,000 180 6,60,000
Working Notes :
(b) Y Dept.
(c) X Dept.
(d) Total Equivalent units produced in X Dept. in terms of those t/f to Y Dept.
= Equivalent units of those t/f to Sell Dept. + t/f to Y Dept. + Closing Stock.
= (30 × 300/100) + 130 + 40 = 260
(e) Calculation of Transfer Prices and Closing Stock.
EXERCISE
Problem 1 : X Ltd. provides you the following information.
Stock as on 1.1.2008 Purchase (for Rs. 4,00,000) Sales
Department A 120 units 1000 Units 1020 units @ Rs. 80.00
Department B 80 units 2000 Units 1920 units @ Rs. 90.50
Department C 152 units 2400 Units 2496 units @ Rs. 100.00
The rate of gross profit is the same in each case.
Required : Prepare Departmental Trading Account for the year 2008.
Problem 2 : Zeenat is earning uniform rate of gross profit in all three departmens he is
handing. Following are the relevant details :
Purchase : Dept. A 15,000 cartons
Dept. R 20,000 cartons
Dept. Z 15,000 cartons
The total cost of the purchase amounted to Rs. 6,00,000.
Sales : Dept. A 16,000 cartons at Rs. 20 per carton
Dept. R 22,000 cartons at Rs. 15 per carton
Dept. Z 17,000 cartons at Rs. 10 per carton
Details of opening stock : Dept. A 4,000 cartons
Dept. R 5,000 cartons
Dept. Z 4,000 cartons
Required : Prepare the trading account for three department :
Problem 3 : Messers D, B and R carried on a business of Drapers and Tailors in Delhi; D was
in charge of Department “A” dealing in cloth. B of Department “B” for selling garments and
R of Department “C” the tailoring section. It had been agreed that each of the three partners
would reveive 75% of the profits disclosed by accounts of the department of which he was in
charge and the balance of the profits would be shared in the proportion : D 1/2, B 1/4 and
R 1/4. The following is the Trading and Profit and Loss Account of the firm for the six
months ended 30th September, 2008.
Dr. Trading and Profit and Loss Account Cr.
for the year ended 30.09.08
Particulars Rs. Particulars Rs.
To Opening Stock : By Sales :
Cloth (A) 37,890 Cloth (A) 1,80,000
Ready-made Garments (B) 24,000 Ready-made Garments (B) 1,30,000
Tailoring Jobs (C) 20,000 Tailoring Jobs (C) 90,000
To Purchases : By Discount received 800
Cloth (A) 1,40,700 By Closing Stock :
Ready-made Garments (B) 80,600 Cloth (A) 45,100
Tailoring Goods (c) 44,400 Ready-made Garments (B) 22,300
To Salaries and Wages 48,000 Tailoring Jobs (C) including
To Advertising 2,400 Rs. 5,700 for goods transferred
To Rent 10,800 from department (A)] 21,600
Problem 5 : X Ltd., has two departments A and B. From the following particulars, prepare
the Consolidated Trading Account and Departmental Trading Account for the year ending
on 31st Dec., 2008.
A B
Rs. Rs.
Opening stock (at cost) 20,000 12,000
Purchases 92,000 12,000
Sales 1,40,000 1,12,000
Wages 12,000 8,000
Carriage 2,000 2,000
Closing Stock :
(i) Purchased goods 4,500 6,000
(ii) Finished goods 24,000 14,000
Purchased goods transferred :
by B to A 10,000
by A to B 8,000
Finished goods transferred :
by A to B 35,000
by B to A 40,000
Return of finished goods :
by A to B 10,000
by B to A 7,000
You are informed that purchased goods have been transferred mutually at their respective
departmental purchased cost and finished goods at departmental market price and that
20%of the finished stock (closing) at each department represented finished goods received
from the other department.
Problem 6 : Department X sells goods to Department Y at a profit of 25% on cost and to
Department Z at 10% profit on cost. Department Y sells goods to X and Z at a profit of 15%
and 20% on sales, respectively. Department Z charges 20% and 25% profit on cost to
Department X and Y, respectively.
Department Managers are entitled to 10% commission on net profit subject to unrealised
profit on departmental sales being eliminated. Departmental profits after charging Managers’
commission, but before adjustment of unrealised profit are as under :
Rs.
Department X 36,000
Deapartment Y 27,000
Department Z 18,000
Stock lying at different departments at the end of the year are as under :
Dept. X Dept. Y Dept. Z
Rs. Rs. Rs.
Transfer from Department X — 15,000 11,000
Transfer from Department Y 14,000 — 12,000
Transfer from Department Z 6,000 5,000 —