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CHAPTER TWENTY-SEVEN. DEPARTMENTAL ACCOUNTING. DEPARTMENTAL ACCOUNTING. Provides separate information about the revenues and expenses of each department Useful to management for three purposes: Planning Control Performance evaluation Generally for internal financial statement users

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chapter twenty seven

CHAPTER TWENTY-SEVEN

DEPARTMENTAL ACCOUNTING

departmental accounting
DEPARTMENTAL ACCOUNTING
  • Provides separate information about the revenues and expenses of each department
  • Useful to management for three purposes:
    • Planning
    • Control
    • Performance evaluation
  • Generally for internal financial statement users
    • Often only the income statement is prepared
slide3

Annie’s Sporting Goods

Income Statement

For Years Ended December 31, 20--

Tennis

Total

Golf

Net sales

$1,075,000

$640,300

$1,715,300

Cost of goods sold

545,280

420,900

966,180

Gross profit

$ 529,720

$219,400

$ 749,120

Operating expenses:

Store clerks wages expense

$ 80,250

Sales, Cost of Goods Sold and Gross Profit

are reported separately for each department.

Truck drivers wages expense

83,900

Advertising expense

79,500

Store rent expense

22,800

Bad debt expense

17,900

Deprec. expense - delivery equip.

24,000

Other operating expenses

350,430

Total operating expenses

$ 658,780

Operating income

$ 90,340

slide4

Annie’s Sporting Goods

Income Statement

For Years Ended December 31, 20--

Tennis

Total

Golf

Net sales

$1,075,000

$640,300

$1,715,300

Cost of goods sold

545,280

420,900

966,180

Gross profit

$ 529,720

$219,400

$ 749,120

Gross profit percentages

49.3%

Operating expenses:

Store clerks wages expense

$ 80,250

Gross Profit ÷ Net Sales

$529,720 ÷ $1,075,000

Truck drivers wages expense

83,900

Advertising expense

79,500

Store rent expense

22,800

Bad debt expense

17,900

Deprec. expense - delivery equip.

24,000

Other operating expenses

350,430

Total operating expenses

$ 658,780

Operating income

$ 90,340

slide5

Annie’s Sporting Goods

Income Statement

For Years Ended December 31, 20--

Tennis

Total

Golf

Net sales

$1,075,000

$640,300

$1,715,300

Cost of goods sold

545,280

420,900

966,180

Gross profit

$ 529,720

$219,400

$ 749,120

Gross profit percentages

49.3%

34.3%

Operating expenses:

Store clerks wages expense

$ 80,250

Gross Profit ÷ Net Sales

$219,400 ÷ $640,300

Truck drivers wages expense

83,900

Advertising expense

79,500

Store rent expense

22,800

Bad debt expense

17,900

Deprec. expense - delivery equip.

24,000

Other operating expenses

350,430

Total operating expenses

$ 658,780

Operating income

$ 90,340

slide6

Annie’s Sporting Goods

Income Statement

For Years Ended December 31, 20--

Tennis

Total

Golf

Net sales

$1,075,000

$640,300

$1,715,300

Cost of goods sold

545,280

420,900

966,180

Gross profit

$ 529,720

$219,400

$ 749,120

Gross profit percentages

49.3%

34.3%

Operating expenses:

Store clerks wages expense

$ 80,250

Golf is earning a much bigger

gross profit percentage than Tennis.

Truck drivers wages expense

83,900

Advertising expense

79,500

Store rent expense

22,800

Bad debt expense

17,900

Deprec. expense - delivery equip.

24,000

Other operating expenses

350,430

Total operating expenses

$ 658,780

Operating income

$ 90,340

slide7

Annie’s Sporting Goods

Income Statement

For Years Ended December 31, 20--

Tennis

Total

Golf

Net sales

$1,075,000

$640,300

$1,715,300

Cost of goods sold

545,280

420,900

966,180

Gross profit

$ 529,720

$219,400

$ 749,120

Gross profit percentages

49.3%

34.3%

Operating expenses:

Store clerks wages expense

$ 80,250

This does not mean that Golf is

more profitable overall, we must look

at the departmental operating expenses.

Truck drivers wages expense

83,900

Advertising expense

79,500

Store rent expense

22,800

Bad debt expense

17,900

Deprec. expense - delivery equip.

24,000

Other operating expenses

350,430

Total operating expenses

$ 658,780

Operating income

$ 90,340

operating expenses
OPERATING EXPENSES
  • Two classifications:
    • Direct
      • Incurred for the sole benefit of and are traceable directly to a specific department
      • Assigned to departments based on the actual expenses incurred
    • Indirect
      • Incurred for the benefit of the business as a whole and cannot be traced directly to a specific department
slide9

Annie’s Sporting Goods

Income Statement

For Years Ended December 31, 20--

Tennis

Total

Golf

Net sales

$1,075,000

$640,300

$1,715,300

Cost of goods sold

545,280

420,900

966,180

Gross profit

$ 529,720

$219,400

$ 749,120

Operating expenses:

Store clerks wages expense

$ 80,250

Truck drivers wages expense

83,900

Advertising expense

79,500

Annie’s employs five store clerks.

Two work in the Golf department,

one in the Tennis department and

two assist customers in Both departments.

Store rent expense

22,800

Bad debt expense

17,900

Deprec. expense - delivery equip.

24,000

Other operating expenses

350,430

Total operating expenses

$ 658,780

Operating income

$ 90,340

store clerk wages expense
STORE CLERK WAGES EXPENSE

Employee Number

Dept.

Wages

1

Golf

$19,000

2

Golf

17,000

3

Tennis

15,250

4

Both

13,000

5

Both

16,000

$80,250

$29,000 ($13,000 + $16,000) needs to be

allocated between Golf and Tennis.

store clerk wages expense1
STORE CLERK WAGES EXPENSE

Golf

Tennis

Sales

$1,075,000

$640,300

Total Sales

$1,715,300

$1,715,300

62.7%

37.3%

Allocation is made based on

percentage of total sales.

store clerks wages expense
STORE CLERKS WAGES EXPENSE

Golf

Tennis

Total

Direct expense

$15,250

$51,250

$36,000

Indirect expense allocation:

62.7% x

$29,000

18,183

18,183

37.3% x

$29,000

10,817

10,817

$54,183

$26,067

$80,250

slide13

Annie’s Sporting Goods

Income Statement

For Years Ended December 31, 20--

Tennis

Total

Golf

Net sales

$1,075,000

$640,300

$1,715,300

Cost of goods sold

545,280

420,900

966,180

Gross profit

$ 529,720

$219,400

$ 749,120

Operating expenses:

Store clerks wages expense

$54,183

$26,067

$ 80,250

Truck drivers wages expense

83,900

Advertising expense

79,500

Store rent expense

22,800

Bad debt expense

17,900

Deprec. expense - delivery equip.

24,000

Other operating expenses

350,430

Total operating expenses

$ 658,780

Operating income

$ 90,340

slide14

Annie’s Sporting Goods

Income Statement

For Years Ended December 31, 20--

Tennis

Total

Golf

Net sales

$1,075,000

$640,300

$1,715,300

Cost of goods sold

545,280

420,900

966,180

Gross profit

$ 529,720

$219,400

$ 749,120

Operating expenses:

Store clerks wages expense

$54,183

$26,067

$ 80,250

Truck drivers wages expense

83,900

Advertising expense

79,500

Store rent expense

22,800

Annie’s has 3 drivers.

1 driver delivers only Golf equipment

and 2 drivers deliver both.

Bad debt expense

17,900

Deprec. expense - delivery equip.

24,000

Other operating expenses

350,430

Total operating expenses

$ 658,780

Operating income

$ 90,340

truck drivers wages expense
TRUCK DRIVERS WAGES EXPENSE

Golf

Tennis

Total

Direct expense

$ 0

$29,000

$29,000

Salary of the one driver who

delivers only Golf equipment.

truck drivers wages expense1
TRUCK DRIVERS WAGES EXPENSE

Golf

Tennis

Total

Direct expense

$ 0

$29,000

$29,000

Indirect expense allocation:

70% x

$54,900

30% x

$54,900

The two other drivers are allocated

based on the dollar amount of the

Golf and Tennis equipment delivered.

truck drivers wages expense2
TRUCK DRIVERS WAGES EXPENSE

Golf

Tennis

Total

Direct expense

$ 0

$29,000

$29,000

Indirect expense allocation:

70% x

$54,900

38,430

38,430

30% x

$54,900

16,470

16,470

$67,430

$16,470

$83,900

slide18

Annie’s Sporting Goods

Income Statement

For Years Ended December 31, 20--

Tennis

Total

Golf

Net sales

$1,075,000

$640,300

$1,715,300

Cost of goods sold

545,280

420,900

966,180

Gross profit

$ 529,720

$219,400

$ 749,120

Operating expenses:

Store clerks wages expense

$54,183

$26,067

$ 80,250

Truck drivers wages expense

67,430

16,470

83,900

Advertising expense

79,500

Store rent expense

22,800

Bad debt expense

17,900

Deprec. expense - delivery equip.

24,000

Other operating expenses

350,430

Total operating expenses

$ 658,780

Operating income

$ 90,340

slide19

Annie’s Sporting Goods

Income Statement

For Years Ended December 31, 20--

Tennis

Total

Golf

Net sales

$1,075,000

$640,300

$1,715,300

Cost of goods sold

545,280

420,900

966,180

Gross profit

$ 529,720

$219,400

$ 749,120

Operating expenses:

Store clerks wages expense

$54,183

$26,067

$ 80,250

Truck drivers wages expense

67,430

16,470

83,900

Advertising expense

79,500

Store rent expense

22,800

Annie’s advertising in both the

newspaper and the radio

Bad debt expense

17,900

Deprec. expense - delivery equip.

24,000

Other operating expenses

350,430

Total operating expenses

$ 658,780

Operating income

$ 90,340

advertising expense
ADVERTISING EXPENSE

GOLF

TENNIS

MIXED

$17,000

$12,000

$16,000

NEWSPAPER

RADIO

Annie’s newspaper advertising

is based on the number of

inches of copy space.

advertising expense1
ADVERTISING EXPENSE

GOLF

TENNIS

MIXED

$17,000

$12,000

$16,000

NEWSPAPER

34,500

RADIO

All the radio advertising

is considered “mixed.”

advertising expense2
ADVERTISING EXPENSE

GOLF

TENNIS

MIXED

$17,000

$12,000

$16,000

NEWSPAPER

34,500

RADIO

$17,000

$12,000

$50,500

advertising expense3
ADVERTISING EXPENSE

Golf

Tennis

Total

Direct expense

$12,000

$29,000

$17,000

Indirect expense allocation:

62.7% x

$50,500

31,664

31,664

37.3% x

$50,500

18,836

18,836

$31,664

$18,836

$79,500

The “mixed” costs are allocated

based on the percentage of total sales.

slide24

Annie’s Sporting Goods

Income Statement

For Years Ended December 31, 20--

Tennis

Total

Golf

Net sales

$1,075,000

$640,300

$1,715,300

Cost of goods sold

545,280

420,900

966,180

Gross profit

$ 529,720

$219,400

$ 749,120

Operating expenses:

Store clerks wages expense

$54,183

$26,067

$ 80,250

Truck drivers wages expense

67,430

16,470

83,900

Advertising expense

48,664

30,836

79,500

Store rent expense

22,800

Bad debt expense

17,900

Deprec. expense - delivery equip.

24,000

Other operating expenses

350,430

Total operating expenses

$ 658,780

Operating income

$ 90,340

slide25

Annie’s Sporting Goods

Income Statement

For Years Ended December 31, 20--

Tennis

Total

Golf

Net sales

$1,075,000

$640,300

$1,715,300

Cost of goods sold

545,280

420,900

966,180

Gross profit

$ 529,720

$219,400

$ 749,120

Operating expenses:

Store clerks wages expense

$54,183

$26,067

$ 80,250

Truck drivers wages expense

67,430

16,470

83,900

Advertising expense

48,664

30,836

79,500

Store rent expense

22,800

Bad debt expense

17,900

Next we will split the rent.

Deprec. expense - delivery equip.

24,000

Other operating expenses

350,430

Total operating expenses

$ 658,780

Operating income

$ 90,340

store rent expense
STORE RENT EXPENSE

Golf

Tennis

Total

Direct expense

Indirect expense allocation:

64% x

$22,800

$14,592

$14,592

36% x

$22,800

8,208

$8,208

$14,592

$8,208

$22,800

All of the rent is considered

indirect (“mixed”) and will be

allocated based on square foot of floor space.

slide27

Annie’s Sporting Goods

Income Statement

For Years Ended December 31, 20--

Tennis

Total

Golf

Net sales

$1,075,000

$640,300

$1,715,300

Cost of goods sold

545,280

420,900

966,180

Gross profit

$ 529,720

$219,400

$ 749,120

Operating expenses:

Store clerks wages expense

$54,183

$26,067

$ 80,250

Truck drivers wages expense

67,430

16,470

83,900

Advertising expense

48,664

30,836

79,500

Store rent expense

14,592

8,208

22,800

Bad debt expense

17,900

Deprec. expense - delivery equip.

24,000

Other operating expenses

350,430

Total operating expenses

$ 658,780

Operating income

$ 90,340

slide28

Annie’s Sporting Goods

Income Statement

For Years Ended December 31, 20--

Tennis

Total

Golf

Net sales

$1,075,000

$640,300

$1,715,300

Cost of goods sold

545,280

420,900

966,180

Gross profit

$ 529,720

$219,400

$ 749,120

Operating expenses:

Store clerks wages expense

$54,183

$26,067

$ 80,250

Truck drivers wages expense

67,430

16,470

83,900

Advertising expense

48,664

30,836

79,500

Store rent expense

14,592

8,208

22,800

Bad debt expense

9,000

8,900

17,900

Deprec. expense - delivery equip.

24,000

All are direct expenses

and are assigned based on

experience with accounts written off.

Other operating expenses

350,430

Total operating expenses

$ 658,780

Operating income

$ 90,340

slide29

Annie’s Sporting Goods

Income Statement

For Years Ended December 31, 20--

Tennis

Total

Golf

Net sales

$1,075,000

$640,300

$1,715,300

Cost of goods sold

545,280

420,900

966,180

Gross profit

$ 529,720

$219,400

$ 749,120

Operating expenses:

Store clerks wages expense

$54,183

$26,067

$ 80,250

Truck drivers wages expense

67,430

16,470

83,900

Advertising expense

48,664

30,836

79,500

Store rent expense

14,592

8,208

22,800

Bad debt expense

9,000

8,900

17,900

Deprec. Exp. - delivery equip.

24,000

Other operating expenses

350,430

3 trucks

1 exclusively for Golf, other two used for both

Total operating expenses

$ 658,780

Operating income

$ 90,340

depreciation expense delivery equipment
DEPRECIATION EXPENSE -DELIVERY EQUIPMENT

Golf

Tennis

Total

Direct expense

$ 0

$ 9,000

$ 9,000

Indirect expense allocation:

Depreciation on the one truck that

is exclusively used

for Golf equipment deliveries

depreciation expense delivery equipment1
DEPRECIATION EXPENSE -DELIVERY EQUIPMENT

Golf

Tennis

Total

Direct expense

$ 0

$ 9,000

$ 9,000

Indirect expense allocation:

70% x

$15,000

10,500

10,500

30% x

$15,000

$ 4,500

4,500

$19,500

$ 4,500

$24,000

The other two trucks are allocated

based on the dollar amount

of equipment delivered.

slide32

Annie’s Sporting Goods

Income Statement

For Years Ended December 31, 20--

Tennis

Total

Golf

Net sales

$1,075,000

$640,300

$1,715,300

Cost of goods sold

545,280

420,900

966,180

Gross profit

$ 529,720

$219,400

$ 749,120

Operating expenses:

Store clerks wages expense

$54,183

$26,067

$ 80,250

Truck drivers wages expense

67,430

16,470

83,900

Advertising expense

48,664

30,836

79,500

Store rent expense

14,592

8,208

22,800

Bad debt expense

9,000

8,900

17,900

Deprec. expense - delivery equip.

19,500

4,500

24,000

Other operating expenses

350,430

Total operating expenses

$ 658,780

Operating income

$ 90,340

other operating expenses
OTHER OPERATING EXPENSES

Golf

Tennis

Total

Direct expense

$ 31,980

$116,400

$ 84,420

Indirect expense allocation:

159,380

74,650

234,030

$243,800

$106,630

$350,430

This broad range of expenses are assigned

and allocated using many of the methods

described previously.

slide34

Annie’s Sporting Goods

Income Statement

For Years Ended December 31, 20--

Tennis

Total

Golf

Net sales

$1,075,000

$640,300

$1,715,300

Cost of goods sold

545,280

420,900

966,180

Gross profit

$ 529,720

$219,400

$ 749,120

Operating expenses:

Store clerks wages expense

$54,183

$26,067

$ 80,250

Truck drivers wages expense

67,430

16,470

83,900

Advertising expense

48,664

30,836

79,500

Store rent expense

14,592

8,208

22,800

Bad debt expense

9,000

8,900

17,900

Deprec. expense - delivery equip.

19,500

4,500

24,000

Other operating expenses

243,800

106,630

350,430

Total operating expenses

$ 658,780

Operating income

$ 90,340

slide35

Annie’s Sporting Goods

Income Statement

For Years Ended December 31, 20--

Tennis

Total

Golf

Net sales

$1,075,000

$640,300

$1,715,300

Cost of goods sold

545,280

420,900

966,180

Gross profit

$ 529,720

$219,400

$ 749,120

Operating Income Percentages:

Golf $72,551 ÷ $1,075,000 = 6.7%

Tennis $17,789 ÷ $640,300 = 2.8%

Just as with the Gross Profit %,

Golf is more profitable than Tennis.

Operating expenses:

Store clerks wages expense

$54,183

$26,067

$ 80,250

Truck drivers wages expense

67,430

16,470

83,900

Advertising expense

48,664

30,836

79,500

Store rent expense

14,592

8,208

22,800

Bad debt expense

9,000

8,900

17,900

Deprec. expense - delivery equip.

19,500

4,500

24,000

Other operating expenses

243,800

106,630

350,430

Total operating expenses

$ 457,169

$ 201,611

$ 658,780

Operating income

$ 72,551

$ 17,789

$ 90,340

slide36

Annie’s Sporting Goods

Income Statement

For Years Ended December 31, 20--

Tennis

Total

Golf

Net sales

$1,075,000

$640,300

$1,715,300

Cost of goods sold

545,280

420,900

966,180

Gross profit

$ 529,720

$219,400

$ 749,120

Operating Expense Percentages:

Golf $457,169 ÷ $1,075,000 = 42.5%

Tennis $201,611 ÷ $640,300 = 31.5%

Operating expenses:

Store clerks wages expense

$54,183

$26,067

$ 80,250

Truck drivers wages expense

67,430

16,470

83,900

Advertising expense

48,664

30,836

79,500

Store rent expense

14,592

8,208

22,800

Bad debt expense

9,000

8,900

17,900

Deprec. expense - delivery equip.

19,500

4,500

24,000

Other operating expenses

243,800

106,630

350,430

Total operating expenses

$ 457,169

$ 201,611

$ 658,780

Operating income

$ 72,551

$ 17,789

$ 90,340

direct operating margin
DIRECT OPERATING MARGIN
  • Difference between a department’s gross profit and its direct operating expenses
  • Indirect expenses are then subtracted from the total direct operating margin to calculated operating income
    • Indirect expenses are not allocated to specific departments
slide38

Annie’s Sporting Goods

Income Statement

For Years Ended December 31, 20--

Tennis

Total

Golf

Net sales

$1,075,000

$640,300

$1,715,300

Cost of goods sold

545,280

420,900

966,180

Gross profit

$ 529,720

$219,400

$ 749,120

Direct operating expenses:

Store clerks wages expense

$36,000

$15,250

$ 51,250

Direct Operating Margin helps us

evaluate departmental performance.

Truck drivers wages expense

29,000

29,000

Advertising expense

17,000

12,000

29,000

Bad debt expense

9,000

8,900

17,900

Deprec. expense - delivery equip.

9,000

9,000

Other operating expenses

84,420

31,980

116,400

Total direct operating expenses

$ 184,420

$ 68,130

$ 252,550

Dept. direct operating margin

$ 345,300

$151,270

$ 496,570

Indirect operating expenses:

Store clerks wages expense

$ 29,000

slide39

Annie’s Sporting Goods

Income Statement

For Years Ended December 31, 20--

Tennis

Total

Golf

Net sales

$1,075,000

$640,300

$1,715,300

Cost of goods sold

545,280

420,900

966,180

Gross profit

$ 529,720

$219,400

$ 749,120

Direct Operating Margin percentage

Golf $345,300 ÷ $1,075,000 = 32.1%

Tennis $151,270 ÷ $640,300 = 23.6%

Golf is once again better! Is it because of the

Gross Profit or Operating Expenses or both?

Direct operating expenses:

Store clerks wages expense

$36,000

$15,250

$ 51,250

Truck drivers wages expense

29,000

29,000

Advertising expense

17,000

12,000

29,000

Bad debt expense

9,000

8,900

17,900

Deprec. expense - delivery equip.

9,000

9,000

Other operating expenses

84,420

31,980

116,400

Total direct operating expenses

$ 184,420

$ 68,130

$ 252,550

Dept. direct operating margin

$ 345,300

$151,270

$ 496,570

Indirect operating expenses:

Store clerks wages expense

$ 29,000

slide40

Annie’s Sporting Goods

Income Statement

For Years Ended December 31, 20--

Tennis

Total

Golf

Net sales

$1,075,000

$640,300

$1,715,300

Direct Operating Expense percentage

Golf $184,420 ÷ $1,075,000 = 17.2%

Tennis $68,130 ÷ $640,300 = 10.6%

This time Tennis is better!

Tennis is more effectively controlling their expenses,

but with Golf’s better Gross Profit, Golf still ended

with a better Direct Operating Margin.

Cost of goods sold

545,280

420,900

966,180

Gross profit

$ 529,720

$219,400

$ 749,120

Direct operating expenses:

Store clerks wages expense

$36,000

$15,250

$ 51,250

Truck drivers wages expense

29,000

29,000

Advertising expense

17,000

12,000

29,000

Bad debt expense

9,000

8,900

17,900

Deprec. expense - delivery equip.

9,000

9,000

Other operating expenses

84,420

31,980

116,400

Total direct operating expenses

$ 184,420

$ 68,130

$ 252,550

Dept. direct operating margin

$ 345,300

$151,270

$ 496,570

Indirect operating expenses:

Store clerks wages expense

$ 29,000

slide41

Annie’s Sporting Goods

Income Statement

For Years Ended December 31, 20--

Tennis

Total

Golf

Net sales

$1,075,000

$640,300

$1,715,300

Cost of goods sold

545,280

420,900

966,180

Gross profit

$ 529,720

$219,400

$ 749,120

Direct operating expenses:

Direct Operating Margin also helps us

determine the contribution a department

makes to the overall operating income

of the company.

Store clerks wages expense

$36,000

$15,250

$ 51,250

Truck drivers wages expense

29,000

29,000

Advertising expense

17,000

12,000

29,000

Bad debt expense

9,000

8,900

17,900

Deprec. expense - delivery equip.

9,000

9,000

Other operating expenses

84,420

31,980

116,400

Total direct operating expenses

$ 184,420

$ 68,130

$ 252,550

Dept. direct operating margin

$ 345,300

$151,270

$ 496,570

Indirect operating expenses:

Store clerks wages expense

$ 29,000

slide42

$ 68,130

$ 252,550

Total direct operating expenses

$ 184,420

Dept. direct operating margin

$ 345,300

$151,270

$ 496,570

Indirect operating expenses:

Store clerks wages expense

$ 29,000

Truck drivers wages expense

54,900

Advertising expense

50,500

Store rent expense

22,800

Deprec. expense - delivery equip.

15,000

Other operating expenses

234,030

Total indirect operating exp.

$ 406,230

Operating income

$ 90,340

Tennis department contributes $151,270

to help cover the

indirect operating expenses.

discontinuing a department
DISCONTINUING A DEPARTMENT
  • Management must focus on the revenues and expenses that will be eliminated if a department is discontinued.
    • Need to look at the Direct Operating Margin.
    • Indirect expenses are usually for the whole business and therefore will not be reduced when a department is discontinued.
discontinuing a department1
DISCONTINUING A DEPARTMENT

Dept A

Dept B

Dept C

Total

$210,000

$185,000

$170,000

$565,000

Net Sales

Cost of Goods Sold

115,000

110,000

96,000

321,000

Gross Margin

$ 95,000

$ 75,000

$ 74,000

$244,000

Direct Operating Expenses

55,000

45,000

54,000

154,000

Dept. Direct Oper. Margin

$ 40,000

$ 30,000

$ 20,000

$ 90,000

Indirect Operating Expenses

27,000

22,000

25,000

74,000

Operating income (loss)

$ 13,000

$ 8,000

$ (5,000)

$ 16,000

Given the Net Loss, management

is considering discontinuing Dept. C.

discontinuing a department2
DISCONTINUING A DEPARTMENT

Dept A

Dept B

Dept C

Total

$210,000

$185,000

$170,000

$565,000

Net Sales

Cost of Goods Sold

115,000

110,000

96,000

321,000

Gross Margin

$ 95,000

$ 75,000

$ 74,000

$244,000

Direct Operating Expenses

55,000

45,000

54,000

154,000

Dept. Direct Oper. Margin

$ 40,000

$ 30,000

$ 20,000

$ 90,000

Indirect Operating Expenses

27,000

22,000

25,000

74,000

Operating income (loss)

$ 13,000

$ 8,000

$ (5,000)

$ 16,000

But Dept. C contributes $20,000

to cover the indirect expenses!!!

Without it, profits would be even worse!!