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Principles of Accounting. Departmental Income Statements. Help Lesson #7. By Laurie L. Swanson. Departmental Accounting. Companies can be divided into departments for more effective management and control. Departmental Accounting.

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departmental accounting
Departmental Accounting

Companies can be divided into departments for more effective management and control.

departmental accounting1
Departmental Accounting

This presentation provides a simplified discussion of departmental accounting and departmental income statements.

departmental accounting2
Departmental Accounting

You are probably familiar with some of the departments of discount retail superstores such as clothing, groceries, electronics, auto supplies, and the list continues.

Departments also include the accounting department, purchasing, administration, human resources, and the list goes on.

broad classifications of departments
Broad Classifications of Departments
  • Operating Departments – Perform an organization’s main functions
    • Production
    • Selling
  • Service Departments – Provide support to operating departments
    • Payroll
    • Human Resources
    • Accounting
departmental accounting3
Departmental Accounting

The purpose of departmental accounting is to provide management with information used to evaluate the profitability or cost effectiveness of each department as well as to help set up responsibility centers to assign costs to department managers.

departmental accounting4
Departmental Accounting

Reports for departmental accounting may vary by company and management needs, but one important tool is the Departmental Income Statement.

To see the importance of the information provided by a Departmental Income Statement, look at the example for Doing Fine Company.

doing fine company
Doing Fine Company
  • Doing Fine is a retail business with three operating departments:
    • Clothing
    • Housewares
    • Electronics

Upon looking at the Income Statement for Doing Fine, you might say that the company is in good shape.

departmental accounting5
Departmental Accounting

Are there any areas that require attention at Doing Fine?

To determine the answer to that question, take a look at the Departmental Income Statement for Doing Fine.

management information provided by the departmental income statement
Management Information Provided by the Departmental Income Statement

While Doing Fine is making a profit overall, the Housewares Department has a net loss. This points out an area that management needs to look into to see what, if any, changes need to be made in this department.

e 21 4 expanded
E 21-4 - Expanded
  • See Exercise 21-4 on page 885-886.
  • Prepare Cost Allocation Schedules as instructed
  • Construct a Departmental Income Statement using the additional information on the next slide as well as information found in the Exercise data and from the cost allocation schedules.