ALLOCATION OF EXPENSES IN DEPARTMENTAL ACCOUNTING

DEPARTMENTAL ACCOUNTS BCOM 1ST YEAR

DEPARTMENTAL ACCOUNTS BCOM 1ST YEAR

QUESTION: Give the meaning of Departmental Accounts. Explain the objectives and advantages of Departmental Accounts?

DEPARTMENTAL ACCOUNTS: Departmental accounts 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.

A department is defined as a part with the special or allocated duty/ function or area of activity.

EXAMPLE: A Textile mill which is having head office and factory. Separate accounts are maintained for production facilities and then the final results are sent to head office which is then incorporated by head office in their accounts.

Thus, a departmental accounting system is an accounting information system that records the activities and financial information about the department.

FEATURES OF DEPARTMENTAL ACCOUNTING

  • The accounts are prepared separately for each department.
  • Each department is taken as profit center.
  • Planning and budgeting is done separately for each department based on its own accounting records.
  • The accounts of various departments are consolidated to provide a whole view of the company.
  • Departmental Accounting is generally adopted by the multi national corporations.

OBJECTIVES OF DEPARTMENTAL ACCOUNTING

The following are the objectives of the departmental accounting:

ASSESSING OPERATIONAL EFFICIENCY: The main aim of departmental accounting is to assess the operational efficiency of each department separately. Each department prepare its own accounts and this leads to knowing its profitability position separately from others. Also the stock turnover ratio and other ratios are calculated separately that tells about its efficiency.

OPEN OR SHUT DEPARTMENT: Departmental accounting helps to know about the profit or loss incurred by each department. After analyzing the whole financial position of the department from its accounts, the decision can be taken whether to shut the department or not.

Also in departmental accounting, the workload of any department can be checked out. It helps in taking decision of the opening of a new separate department.

INTER-DEPARTMENTAL COMPARISON IS POSSIBLE: Departmental Accounting helps in comparing one department with the other. It highlights the positive points of each department. Inter-departmental comparison induces officials of departments to perform better.

DETAILED INFORMATION ABOUT CONCERN: In departmental accounting, firstly accounts are made on the basis of the departments and then are consolidated to make accounts of company as a whole. By doing this, we can get detailed information about all the departments.

IMPROVEMENT IN OVERALL PROFIT OF THE BUSINESS: The friendly rivalry among all the departments induces them to work in the best possible way. Efficiency at each department level leads to the efficiency of the whole company. This makes improvement in overall profit of the business.

SOUND PLANNING AND BUDGETING: In departmental accounting, every department makes its budget at its own. It is easy for the officials to take decisions or plan about their future course of action. Thus, planning and budgeting at departmental level promotes sound planning for company also.

OTHER OBJECTIVES: The other objectives of departmental accounting are as follows:

  • The growth potential of each department in comparison to other can be evaluated.
  • Departmental managers and staff can be rewarded properly on the basis of the results.
  • It helps the management to determine the justification of capital outlay in each department.
  • It facilitates the comparison of expenses items with those in other departments and in the previous period.

ADVANTAGES OF DEPARTMENTAL ACCOUNTING

The main advantages of departmental accounts are as follows:

EVALUATION OF INCREASE IN EFFICIENCY: When separate profit and loss is calculated  for each department, we can measure the efficiency of each department. We can take steps to increase the efficiency by decreasing the expenses of less profitable departments or by closing the departments which are running into the losses.

COMPARISON BECOMES EASY: The departmental accounting makes the board of directors able to make comparison of the departments on the basis of the:

  • Expenses incurred
  • Targets realized
  • Revenue earned

Results of different departments can be computed and it becomes easy to locate the shortcomings which will help in improvement of the results.

COMPUTATION OF COMMISSION: There can be such employees working in the different departments which are employed on the basis of commission on sale or commission on net profits. It can only be calculated if separate result of sales or profits is known.

ASSISTANCE IN FRAMING FUTURE POLICIES: When results of different departments are known separately, following decisions can be taken easily:

  • Which department needs expansion?
  • When department activities are to be curtailed?
  • When department needs closure?

OTHER BENEFITS: The other advantages of departmental accounting are as follows:

  • It enables the business to chalk out the policies relating to expansion of the business.
  • Departmental managers can be rewarded or penalized on the basis of the performances.
  • It facilitates allocation of various expenses on sound basis.
  • Healthy competition between departments increases overall profits of the concern.
  • It helps to measure the efficiency of each department by calculating inventory turnover ratio of each department.
  • It supplies accounting information regarding results of various departments to the shareholders, investors, debenture holders and suppliers.

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