Chapter 24
Departmental Accounting
Chapter Overview
This chapter discusses how companies prepare income statements by department so management can see
each department’s efficiency and contribution to the company’s overall performance.
The balance sheet illustrates a company’s assets, liabilities, and equity as of a certain date and cannot be
broken down by department. The income statement can be broken down by department, and there are
Learning Objectives
After studying Chapter 24, your students should gain proficiency in the following:
2. Explain How Operating Expenses Are Broken Down by Departments.
3. Explain Contribution Margin on the Income Statement: Calculate Contribution Margin.
Chapter 24 Assignment Grid
Estimated Level
Learning Time in of
Assignment Topic(s) Objective(s) Minutes Difficulty
Discussion Questions and Critical Thinking/Ethical Case
1 Cost and Profit Center 1 5 Easy
2 Gross Profit 1 5 Easy
3 Departmental Accounting 1 5 Easy
Concept Checks
1 Appropriation Based on Sales 2 10 Easy
2 Appropriation Based on Square Footage 2 10 Easy
3 Net Income from Total Operating Expenses 2 15 Easy
4 Departmental Income before Tax 2 20 Easy
5 Contribution Margin 3 30 Easy
Exercises (Set A)
24A-1 Appropriation Based on Sales 2 20 Easy
24A-2 Appropriation Based on Square Footage 2 20 Easy
Exercises (Set B)
24B-1 Appropriation Based on Sales 2 20 Easy
24B-2 Appropriation Based on Square Footage 2 20 Easy
24B-3 Net Income 2 20 Easy
24B-4 Departmental Income before Tax 2 20 Easy
24B-5 Contribution Margin 3 30 Medium
Problems (Set A)
24A-1 Departmental Gross Profit Income Statement 2 60 Hard
24A-2 Departmental Allocation 2 60 Medium
Learning Unit 24-1: The Income Statement Focused on Gross
Profit by Departments
Summary: Each department is a unit in which the manager has the responsibility for controlling and
incurring certain costs as well as generating revenue. This unit is known as a profit center. If a manager
had the responsibility to control costs, but not for directly generating revenue, the unit would be called a
Key Concepts: Profit center, cost center.
Lecture Outline:
1. Each individual unit or department is called:
2. Gross profit per unit – requires the company to gather information about each department.
a. Computers aid companies with keeping separate records for each department.
b. Income statements can be:
i. Separated by departments, but that is not possible for the balance sheet.
ii. Used to analyze how well a business or department is performing.
Teaching Tips/Strategy: Students need to differentiate between a cost center and profit center. The
Success Coach LU 24-1 and Discussion Question #1 are excellent discussion items to help clarify the
objective.
Use the “Ten-Minute Quiz” questions #5-#6 to reinforce the learning concepts.
Learning Unit 24-2: How Operating Expenses Are Broken Down by
Departments
Summary: Direct Expenses are operating expenses that can be traced and identified directly to separate
departments. The operating expenses that cannot be identified with a specific department but are
incurred on behalf of the company are called indirect expenses. The income statement and net income is
determined by the allocation of the direct and indirect expenses per department. (Figure 24.5)
Key Concepts: Direct expenses, indirect expenses.
Lecture Outline:
1. Expenses can be categorized as:
3. Building Expense – an indirect expense allocated on the basis of square footage (square footage per
department / total square feet).
5. Advertising Expenses:
6. Depreciation Expense – an indirect expense that needs to be allocated to each department. The
allocation method is selected by management. Some common allocation methods are:
7. Administrative Expense – an indirect expense that needs to be allocated to each department. The
allocation method is selected by management and a common method is: gross sales per department /
total gross sales.
Teaching Tips/Strategy: Develop a step-by-step process utilizing Concept Checks #1 and #2 to teach
the allocation concept. After the concepts are discussed, group the students in pairs (pair/share) and
assign four different Exercises (24A-1, 24A-2, 24B-1, and 24B-2). After all groups are finished, the
students can share the findings with the other groups. Use Problems 24A-2 and 24B-2 to review the
concept objectives.
Use the “Ten-Minute Quiz” questions #1-#4 and #7 to reinforce the learning concepts.
Learning Unit 24-3: Contribution Margin on the Income Statement
Summary: The Contribution Margin approach (Figure 24.6) lists direct departmental expenses and the
contribution each department makes to cover indirect expenses. The contribution margin can also be
defined as the gross profit of a department minus its direct expenses. This approach charges to a
Key Concepts: Contribution margin
Lecture Outline:
1. Contribution Margin Approach – financial statement illustration of a department’s contribution
margin used to cover indirect expenses.
3. This approach theorizes indirect expenses are not controlled by the department manager and
should not be used in evaluating departmental performance.
4. Departmental evaluation considers expansion or reduction and needs to consider:
a. The effect dropping a department would have in terms of loss of its contribution margin.
For example, would closing a jewelry department in a clothing store reduce the store’s
total administrative expenses?
b. The effect one department has in drawing customers to other departments. Do customers
who come into the store to look at jewelry go on to look at dresses in another
department?
c. Trends in the industry. Even though a certain department is not doing well, all the
e. The text example illustrates how eliminating a department that has a net loss may in fact
cause an even greater loss in the overall net income for the company.
Teaching Tips/Strategy: Use the Success Coach LU 24-3and Concept Check #5 as classroom
discussion/ practice. The Exercise 24A-5 and Problem 24A-4 are excellent for classroom discussion
and step-by-step practice.
Use the “Ten-Minute Quiz” question #8 – #10 to reinforce the entire chapter’s learning
concepts.
Name Date Section
CHAPTER 24
TEN-MINUTE QUIZ
Circle the letter of the best response.
1. Assigning indirect costs to a specific department is called:
a. cost tracing b. cost allocation
c. cost assignment d. cost directing
2. Assigning direct costs to a specific department is called:
a. cost tracing b. cost allocation
c. cost assignment d. cost directing
3. Costs identifiable with a specific department are:
a. product costs b. period costs
c. direct costs d. indirect costs
4. Costs not identifiable with a specific department are:
a. product costs b. period costs
c. direct costs d. indirect costs
5. A profit center:
a. holds each department accountable for revenue and expenses
b. holds each department accountable for the company’s net income
c. holds each department responsible for revenue
d. holds each department responsible for expenses
6. A cost center:
a. holds each department accountable for revenue and expenses
b. holds each department accountable for the company’s net income
c. holds each department responsible for revenue
d. holds each department responsible for expenses
7. Which is the best method for allocating depreciation?
a. percentage of sales b. percentage of square footage
c. percentage of sales salaries d. percentage of delivery costs
8. A company’s record shows the following:
Pennsylvania Stores Oregon Stores Total
Sales $530,000 $270,000 $800,000
Building Expense $320,000
Square feet 2,500 1,500
Sales Salaries $120,000
Delivery costs $30,000
If a company uses square footage to allocate costs, how much of building expenses should be
allocated to the Pennsylvania stores?
a. $1,500
b. $2,500
c. $120,000
d. $200,000
9. A company’s record shows the following:
Pennsylvania Stores Oregon Stores Total
Sales $530,000 $270,000 $800,000
Building Expense $320,000
Square feet 2,500 1,500
Sales Salaries $120,000
Delivery costs $30,000
If a company uses sales to allocate costs, how much of delivery costs should be allocated to the
Oregon stores?
a. $10,125
b. $19,875
c. $270,000
d. $530,000
10. A company’s record shows the following:
Pennsylvania Stores Oregon Stores Total
Sales $530,000 $270,000 $800,000
Building Expense $320,000
Square feet 2,500 1,500
Sales Salaries $120,000
Delivery costs $30,000
If a company uses sales to allocate costs, how much of sales salaries should be allocated to the
Oregon stores?
a. $40,500
b. $79,500
c. $270,000
d. $530,000
Answer Key to Chapter 24 Quiz
1. b