Allocation of expenses in departmental accounting
Departmental Accounting refers to maintaining accounts for one or more departments of the company. Revenues and expenses of the department are recorded and reported separately. The departments are then consolidated into the accounts of the head office to prepare the financial statements of the company. The Allocation of expenses in departmental accounting is made on various bases.
Thus, a departmental accounting system is an accounting information system that records the activities and financial information about the department.
ALLOCATION OF EXPENSES IN DEPARTMENTAL ACCOUNTING
The allocation of expenses in departmental accounting is very important issue to arrive at the correct profit and loss account of each department. The expenses are allocated in the following ways:
EXPENSES INCURRED FOR PARTICULAR DEPARTMENT
There are certain expenses which are incurred for particular departments. These expenses are known as direct expenses and charged directly to the department. Example: Salary paid to workers of sales department.
EXPENSES ALLOCATED PRECISELY
Some expenses are paid in lump-sum for the whole business but these can be allocated over different departments precisely. Example: It is possible to allocate electricity expenses over different departments precisely if separate sub-meters have been installed in each department.
EXPENSES CANNOT BE ALLOCATED TO DIFFERENT DEPARTMENTS
There are certain expenses which cannot be allocated among different departments on any sound basis. These expenses should not be allocated as nothing will be gained by an arbitrary allocation. Profits revealed by various departments should be brought down in general Profit and Loss Account and these unallocated expenses should be transferred to this account. Example: Director’s fees, interest on debentures, audit fees, general manager’s salary etc.
EXPENSES CANNOT BE APPORTIONED PRECISELY
There are various expenses which cannot be apportioned precisely. These are allocated among different departments in the proportion of a sound basis to which that particular expenditure is directly related.
CARTAGE, FREIGHT, INWARD ACCOUNT: Above expenses may be divided according to the purchase of each department.
DEPRECIATION: Depreciation may be divided according to the value of assets employed in each department.
REPAIRS AND RENEWAL CHARGES: Repairs and renewal of the assets may be divided according to the value of assets used by each department.
MANAGERIAL SALARY: Managerial salary should be divided according to the time spent by the manager in each department.
BUILDING REPAIR, RENTS AND TAXES, BUILDING INSURANCE ETC.: All the expenses related to the building should be divided according to the floor space occupied by each department.
SELLING AND DISTRIBUTION EXPENSE: All the expenses relating to selling and distribution expenses should be divided according to the sales of each department, such as freight outward, travelling expenses of sales personnels, salary and commission paid to salesman, after sale services expenses, discount and bad debts, etc.
INSURANCE OF PLANT AND MACHINERY: The value of such plant and machinery in each department is the basis of the insurance.
EMPLOYEE/ WORKER INSURANCE: Charges of a group insurance should be divided according to the direct wage expenses of each department.
POWER & FUEL: Power and Fuel will be allocated according to the working hours and power of the machine i.e. Horse Power* Hours worked.
