25-1 1-1 McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

25-11-1McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

25-2

Departmentalized Profit and Cost Centers

Departmentalized Profit and Cost Centers

Section 1: Profit and Cost Centers and

Departmental Accounting

Chapter

25

Section Objectives1. Explain profit centers and cost centers.2. Prepare the Gross Profit section of a departmental income

statement.3. Explain and identify direct and indirect departmental expenses.4. Choose the basis for allocation of indirect expenses and

compute the amounts to be allocated to each department.

25-3

Managerial Accounting

Provides financial information about business segments, activities, or products.

Supplies information on profitability of a specific department or order.

Provides data for making decisions.

25-4

Cost centers do not directly earn revenue.

Cost centers often provide services to other business segments:

Accounting department

Information systems department

Purchasing department

Cost Centers

25-5

Profit Centers

Accounting data is gathered and analyzed separately for each center.

Sells products or services to customers outside the business.

Can also be a segment of a company that

provides a product to another revenue- producing segment.

25-6

Responsibility Accounting allows management to evaluate the performance of each segment of the business and assign responsibility for its financial segments.

Responsibility AccountingResponsibility Accounting

25-7

Why do businesses track revenue and expenses by

segment?

QUESTION:

Detailed data on individual departments helps managers assess the profitability of

products and department operations

ANSWER:

25-8

Departmentalized Operations

Departmental accounts are included in the general ledger.

Sales and purchases are recorded by department.

Merchandise inventories are counted and reported by department.

25-9

Departmental Income Statement

Gross profit by department

25-10

Direct expenses can be identified directly with a department.

Indirect expenses cannot be directly related to an activity in a department.

Semidirect expenses cannot be directly assigned to individual departments, but are closely related to individual departments.

Operating Expenses

25-11

Takes place after adjusting entries have been made and adjusted trial balance completed.

Can be based on:

percent of sales,

percent of value of merchandise inventory,

percent of space occupied.

Allocating Semidirect and Indirect Expenses

25-12

Insurance: Based on the cost of the furniture, fixtures, and inventory used in the

department’s operations

Utilities: Based on square footage occupied

Expense Allocations

Office Salaries: Based on total sales for each department.

25-13

Do not apply to operations.

Are not allocated to departments.

Appear in the Other Income and Other Expenses section of the income statement.

Nondepartmentalized Expenses

Interest income and interest expenses are

not allocated to departments.

25-14

Departmentalized Profit and Cost Centers

Departmentalized Profit and Cost Centers

Section 2: Departmental

Income Statements

Chapter

25

Section Objectives5. Prepare a departmental income statement showing

the contribution margin and operating income for each department.

6. Use a departmental income statement in making decisions such as whether a department should be closed.

25-15

Reports net income from operations for each department after all expenses are allocated.

Highlights individual department’s financial information.

Identifies the contribution margin for each department.

Departmental Income Statement

25-16

Contribution Margin

Departments with a positive contribution margin help to pay the semidirect and indirect expenses of the business

25-17

Limitations to Departmental Income from Operations

Difficult to determine fair allocation of semidirect and indirect expenses.

Difficult to assess outcome if certain departments were eliminated.

25-18

The concept of contribution margin provides owners and managers with valuable assistance in making decisions.

Contribution Margin

Unfortunately, contribution margin figures are not provided in traditional financial reports.

25-19

A business is said to “break-even” when total revenues equal total expenses.

Another way of describing the break-even point is when the contribution margin equals fixed expenses.

Dividing the Fixed costs by the unit contribution margin will result in the number of units that need to be sold to break even.

The units can be translated into sales dollars by multiplying the result by the selling price of the unit.

The Break-Even Point