Departmental Accounts: Allocation of Expenses and Results

Understand Departmental Accounting: Allocation of Expenses and Departmental Results

Key rules to remember

Departmental gross profit

Gross profit = Sales + Closing stock − Opening stock − Purchases − Direct expenses

Compute for each department separately. Use net figures (after returns).

Share of a common expense

Department's share = Total expense × Department's basis figure ÷ Total of basis figures

The basis figure is sales, area, purchases, workers and so on, depending on the expense.

Common bases of allocation

Rent, repairs of building, lighting, heating → floor area or light points | Carriage inwards, purchase discount → purchases | Selling expenses, discount allowed, bad debts, carriage outwards → sales | Salaries, canteen, staff welfare → number of workers or actual wages | Depreciation, insurance of assets → value of assets | Insurance of stock → value of stock

Use a basis given in the question. If none is given, choose the logical one and state it.

Total column check

Total column = Sum of department columns

Use this to verify arithmetic before you finish.

How to solve Departmental Accounting: Allocation of Expenses and Departmental Results questions

1. 1Read the question and list the departments. Note which items are given department-wise and which are common.
2. 2Adjust figures first: deduct returns from sales and purchases, and add any given adjustments such as goods transferred between departments.
3. 3Pick the basis for each common expense from the information given. Write the basis and ratio in a working note.
4. 4Calculate each department's share of every common expense. Check that the shares add up to the total expense.
5. 5Prepare the departmental trading account in columns for each department and a total. Show opening stock, purchases, direct expenses, sales, closing stock and gross profit.
6. 6Prepare the departmental profit and loss account below it. Bring down gross profit, then charge allocated expenses and show net profit by department.
7. 7Show unallocated expenses and incomes only in the total column, and arrive at the net profit of the whole business.
8. 8Verify that the total column equals the sum of the department columns, and attach your working notes.

Quickest way: Ratio-first columnar method

Common mistakes in Departmental Accounting: Allocation of Expenses and Departmental Results

• Using total sales as the basis for every common expense.

  It is the easy default and students skip reading the basis table.

  Fix: Match the expense to the benefit: rent to area, wages to workers, depreciation to assets, carriage inwards to purchases. Use sales only for selling-type costs.

• Ignoring sales or purchase returns when computing the ratio.

  Students take the gross figure from the trial balance.

  Fix: Use net sales and net purchases for the basis and for the trading account.

• Allocating an expense that the question says to leave unallocated.

  Students feel every item must be spread.

  Fix: Items like proprietor's remuneration or general charges that have no clear basis are charged in the total column only when the question says so or no basis is possible.

• Wrong ratio arithmetic, such as dividing by the wrong total.

  Hurry and no check.

  Fix: Add the shares back and confirm they equal the expense. Reduce ratios to simple whole numbers first.

• Putting direct expenses in the profit and loss account or common expenses in the trading account without reason.

  Students mix up the two accounts.

  Fix: Direct and manufacturing-type costs go in the trading account. Selling, administration and finance costs go in the profit and loss account.

Worked examples