• The company is divided into three business segments: Girls, Boys, and Infant/Preschool divisions.
• The company’s first products were picture frames. A side business of dollhouse furniture made from
picture frame scraps led the company into the toy business.
• In 1955, Mattel, Inc. became the first year-round sponsor of a TV show with “The Mickey Mouse Club.”
• Headquartered in El Segundo, California, Mattel produces 800 million toys annually, its products reach
150 countries.
• Using the contribution margin would allow a business to evaluate a manager on performance and costs
that are controllable by the manager.
1. Managerial accounting focuses on profitability issues of a business. Financial accounting focuses on
reporting results of business operations from a historical perspective.
3. Reports financial data by segments/departments to tie managerial responsibility to operational results.
5. To track profitability of each department.
7. Departmental: reports income for each department, summarizes all departments for total business income.
9. Square footage of departments; charge to department where item located; allocated on basis of net sales.
These questions are designed to check students’ understanding of new terms, concepts, and procedures presented
in the chapter.
Discussion Questions
CHAPTER 25
DEPARTMENTALIZED PROFIT AND COST CENTERS
Chapter Opener: Thinking Critically
Answers will vary. Mattel, Inc. may have measured the profitability of each business line individually, assessing
the contribution made by each to the overall profits of the company. Company managers may have evaluated
how new business lines complement or add value to the core toy business.
Fast Facts
Managerial Implications: Thinking Critically
ALLOCATION
ALLOCATION
PERCENT ALLOCATION
$600,000
$6,000
$594,000
0.5%
$2,970
PERCENT
DEPARTMENT
DEPARTMENT
CREDIT
SALES
BASIS: TOTAL SALES
BASIS: BOOK VALUE
OF INVENTORY AND
EQUIPMENT
TOTAL
INSURANCE
EXPENSE
BASIS: NET
CREDIT SALES
TOTAL OFFICE
EXPENSE
DEPARTMENT PERCENT
CREDIT SALES
RETURNS AND
ALLOWANCES
EXERCISE 25.4
Gross Profit 285500 194 500 48 0000
Direct Expenses 134600 95 400 23 0000
Cazle Company
Income Statement (Partial)
For Year Ended December 31, 2013
KITCHEN
DEPARTMENT
BATH
DEPARTMENT TOTAL
EXERCISE 25.5
Other questions to address could include the following:
1. Would closing Department 1 cause customers of Department 2 to stop buying from the store?
2. Does Department 1 have products that complement Department 2?
3.
EXERCISE 25.6
Net Sales $600,000
EXERCISE 25.7
Management must consider the fact that Department 1 has a positive contribution margin, although it is smaller
than Department 2. Because it has a positive contribution margin, the department is helping to meet the indirect
expenses. If Department 1 is closed, Department 2 would have to pick up the $45,000 of indirect expenses.
Do you have suppliers that provide you with products for both departments? If so, would losing part of their
sales cause your prices to go up?
Department 1 should not be closed. It would reduce net income by 80 percent if it were discontinued. The
PROBLEM 25.1A
Operating Revenues
Sales 536250 288 750 82 50000
Sales Returns and Allowances 4200 2 800 70000
Net Delivered Cost of Purchases 199000 115 000 31 40000
Total Merchandise Available for Sale 244000 130 000 37 40000
Less Merchandise Inventory, December 31 41000 11 000 5 20000
Cost of Goods Sold 203000 119 000 32 20000
Gross Profit on Sales 329050 166 950 49 60000
Rent Expense 27000 9 000 3 60000
Utilities Expense 4500 1 500 60000
Office Salaries Expense 26000 14 000 4 00000
Other Office Expenses 9 1 0 4 9 0 14000
Uncollectible Accounts Expense 3250 1 750 50000
New2U
Income Statement
Year Ended December 31, 2013
DEPARTMENT A DEPARTMENT B TOTAL
PROBLEM 25.1A (continued)
1. Department A ($130,000 ÷ $200,000) × $15,000 = $9,750
Department B (1,500 sq. ft. ÷ 6,000 sq. ft.) × $36,000 = $9,000
3. Department A ($536,250 ÷ $825,000) × $40,000 = $26,000
Department B ($288,750 ÷ $825,000) × $40,000 = $14,000
4. Department A ($532,050 ÷ $818,000) × $5,000 = $3,252
5. Department A ($30,000 ÷ $50,000) × $6,000 = $3,600
Uncollectible Accounts Expense
Depreciation Expense—Furniture and Fixtures
Other Office Expenses
ALLOCATION OF INDIRECT EXPENSES
Insurance Expense
Office Salaries Expense
PROBLEM 25.2A
1.
Sales 126750 75 500 5 0400 252650
Less Sales Returns and Allowances 1 7 5 0 5 0 0 4 0 0 2 6 5 0
Net Sales 125000 75 000 5 0000 250000
Cost of Goods Sold
Indirect Expenses 9 6 0 0 5 4 0 0 5 0 0 0 20000
Net Income (Loss) from Operations 35800 5 300 (7100) 34000
PROBLEM 25.2A (continued)
Net Sales 125000 75 000 5 0000 250000
Percent of Total Net Sales 5 0 3 0 2 0
Times Total Indirect Expenses 20000 20 000 2 0000
3.
departments.
The Yard Shop
Income Statement
PLANTS CHEMICALS TOOLS TOTAL
Year Ended December 31, 2013
PLANTS CHEMICALS TOOLS TOTAL
The effect on total sales if the decision is made to close the Tools Department and how that would impact the sales
PROBLEM 25.1B
Operating Revenues
Sales 300000 200 000 500000
Sales Returns and Allowances 3 0 0 0 2 0 0 0 5 0 0 0
Total Merchandise Available for Sale 148500 104 000 252500
Less Merchandise Inventory, Dec. 31 31000 24 000 55000
Cost of Goods Sold 117500 80 000 197500
Gross Profit on Sales 179500 118 000 297500
Rent Expense 21000 9 000 30000
Utilities Expense 4 2 0 0 1 8 0 0 6 0 0 0
Office Salaries Expense 30000 20 000 50000
Other Office Expenses 9 6 0 6 4 0 1 6 0 0
Uncollectible Accounts Expense 1 8 0 0 1 2 0 0 3 0 0 0
Sports Shop, LLC
Income Statement
Year Ended December 31, 2013
EQUIPMENT CLOTHES TOTAL
PROBLEM 25.1B (continued)
1. Equipment ($70,000 ÷ $100,000) × $18,000 = $12,600
2. Equipment (2,800 sq. ft. ÷ 4,000 sq. ft.) × $30,000 = $21,000
3. Equipment ($300,000 ÷ $500,000) × $50,000 = $30,000
Equipment ($300,000 ÷ $500,000) × $1,600 = $960
Equipment ($300,000 ÷ $500,000) × $500 = $300
ALLOCATION OF INDIRECT EXPENSES
Insurance Expense
Rent Expense
ALLOCATION OF INDIRECT EXPENSES
Office Salaries Expense
Other Office Expenses
Depreciation Expense—Office Equipment
PROBLEM 25.2B
1.
Sales 76900 44 250 3 0200 151350
Less Sales Returns and Allowances 9 0 0 2 5 0 2 0 0 1 3 5 0
Net Sales 76000 44 000 3 0000 150000
Cost of Goods Sold
Indirect Expenses 2 3 0 0 1 1 0 0 6 0 0 4 0 0 0
Net Income (Loss) from Operations 28900 (100) 5600 34400
2.
3.
The supplies department shows a net loss of $100, which is a minor loss in the overall scope of the business. Since
The concept of offering all items to customers may cause concern to the owners if the decision is made to close the
It’s All Paper
Income Statement
Year Ended December 31, 2013
PRINTING SUPPLIES CARDS TOTAL
CRITICAL THINKING PROBLEM 25.1
Wood Clothing Paper Close Close
Crafts Items Goods Totals Paper Goods Clothing Items
Sales 75,000 60,000 20,000 155,000 128,000 95,000
Cost of Goods Sold 27,000 39,500 12,000 78,500 63,500 39,000
2.
3. Advise the owner to keep all departments, but try to increase sales in paper goods.
Analyze: Wood
Crafts
Clothing
Items
Paper
Goods
CRITICAL THINKING PROBLEM 25.2
Using the contribution margin of a department would allow management to evaluate a manager on performance
and costs that are controllable by the manager. Another argument for using the contribution margin in evaluating
a department’s performance, is that even if the department were eliminated, the indirect expenses would still have
to be paid or absorbed by the remaining departments. As a result, most management decisions are based on the
contribution margin rather than net income by department. Management generally recognizes that many indirect
expenses are allocated in a rather arbitrary manner and that many are uncontrollable costs.
If the Clothing Items department is closed, the net income of the business will fall from $17,000 to $12,500.
Do not close the Clothing Items department
SOLUTIONS TO BUSINESS CONNECTIONS
Managerial Focus:
2. Indicates poor cash control procedures; investigate immediately.
4. Past experience; industry practices. Methods should be reasonable and fair.
Ethical Dilemma:
Financial Statement Analysis:
2. The revenue from sale of services was an increase of $500 million or 19% over FY 2008.
Teamwork:
Internet Connection:
Since indirect costs can alter the departmental profit and this profit determines the manager’s bonus, allocating
All production of food products require materials to be requisitioned from inventory and mixed together in a vat
General Motors provides income information by department. The reason General Motors (GMAC) Financial
department is reported separately is that it has a higher net income than its automotive department.
Part A True-False
1. TRUE 11. TRUE
3. TRUE 13. FALSE
5. FALSE 15. FALSE
7. FALSE 17. FALSE
9. TRUE 19. FALSE
Part B Matching
1. c
3. e
SOLUTIONS TO PRACTICE TEST