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CHAPTER, , 12, , DEPARTMENTAL ACCOUNTS, LEARNING OUTCOMES, After studying this Chapter, you will be able to–, , , , , Allocate common expenditures of the organisation among, various departments on appropriate basis, Deal with the inter-departmental transfers and their accounting, treatment, Calculate the amount of unrealised profit on unsold interdepartmental stock-in-hand at the end of the accounting year, , © The Institute of Chartered Accountants of India

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12.2, , ACCOUNTING, , Type of Departments, , Dependent, , Independent, , Have inter-department transfers, , Work independently, have, negligible transfers, , Basis of Allocation of Common, Expenditure among different, Departments, Expenses incurred specially, for each department are, charged., , Common expenses distributed among, the departments on suitable basis., , Inter-department transfers, (forming part of closing inventory), Cost, No unrealised, Profit exists, , Market Price, If Cost >, Market price, , If Cost <, Market price, , Cost plus agreed, percentage of profit, Elimination of unrealised, profit through, Inventory, , © The Institute of Chartered Accountants of India, , P & L A/c

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DEPARTMENTAL ACCOUNTS, , 12.3, , 1. INTRODUCTION, If a business consists of several independent activities, or is divided into several, departments, for carrying on separate functions, its management is usually interested, in finding out the working results of each department to ascertain their relative, efficiencies. This can be made possible only if departmental accounts are prepared., Departmental accounts are of great help and assistance to the managements as they, provide necessary information for controlling the business more intelligently and, effectively. It is also helpful in readily identifying all types of wastages, e.g., wastage of, material or of money; Also, attention is drawn to inadequacies or inefficiencies in the, working of departments or units into which the business may be divided., , 2. ADVANTAGES OF DEPARTMENTAL ACCOUNTING, The main advantages of departmental accounting are as follows:, 1., , Evaluation of performance: The performance of each department can be, evaluated separately on the basis of trading results. An endeavor may be made, to push up the sales of that department which is earning maximum profit., , 2., , Growth potential of each department: The growth potential of a department, as compared to others can be evaluated., , 3., , Justification of capital outlay: It helps the management to determine the, justification of capital outlay in each department., , 4., , Judgement of efficiency: It helps to calculate stock turnover ratio of each, department separately, and thus the efficiency of each department can be, revealed., , 5., , Planning and control: Availability of separate cost and profit figures for each, department facilitates better control. Thus, effective planning and control can be, achieved on the basis of departmental accounting information., , Basically, an organisation usually divides the work in various departments, which is, done on the principle of division of labour. Each department prepares its separate, accounts to judge its individual performance. This can improve efficiency of each and, every department of the organisation., , © The Institute of Chartered Accountants of India

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12.4, , ACCOUNTING, , 3. METHODS OF DEPARTMENTAL ACCOUNTING, There are two methods of keeping departmental accounts:, , 3.1 Accounts of all departments are kept in one book only, To prepare such accounts, it will be necessary first, for the income and expenditure of, department to be separately recorded in subsidiary books and then for them to be, accumulated under separate heads in a ledger or ledgers. This may be done by having, columnar subsidiary books and a columnar ledger., , 3.2 Separate set of books are kept for each department, A separate set of books may be kept for each department, including complete stock, accounts of goods received from or transferred to other departments or as also sales., Nevertheless, even when separate sets of books are maintained for different, departments, it will also be necessary to devise a basis for allocation of common, expenses among the different departments, if an organisation is interested in, determining the separate departmental net profit in addition to the gross profit., , Methods of keeping departmental accounts, Accounts of all departments are kept in, one book only, , Separate set of books are kept for each, department, , Income and expenditure of department is, separately recorded in subsidiary books and then, accumulated under separate heads in a ledger or, ledgers. This may be done by having columnar, subsidiary books and a columnar ledger., , Each department maintains separate books, including complete stock accounts of goods, received from or transferred to other departments, or as also sales. Common expenses need to be, allocated to determine profitability., , 4. BASIS OF ALLOCATION OF COMMON, EXPENDITURE, AMONG, DIFFERENT, DEPARTMENTS, Expenses should be allocated among different departments on a rational basis while, preparing departmental accounts., © The Institute of Chartered Accountants of India

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DEPARTMENTAL ACCOUNTS, , 12.5, , Individual Identifiable Expenses: Expenses incurred specially for a particular, department are charged directly thereto, e.g., insurance charges of stock held by, the department., Common Expenses: Common expenses, the benefit of which is shared by all the, departments and which are capable of precise allocation are distributed among the, departments concerned on some equitable basis considered suitable in the, circumstances of the case., Allocation of Expenses, S. No., 1., 2., 3., , 4., 5., 6., 7., 8., 9., , Expenses, , Basis, , Lighting and Heating expenses, (e.g., energy expenses), , Consumption of energy by each, department, , Carriage inward/ Discount received, , Purchases of each department, , Rent, rates and taxes, repairs and Floor area occupied by each, maintenance, insurance of building, department (if given) otherwise, on time basis, , Selling expenses, e.g., discount, bad Sales of each department, debts, selling commission, freight, outward, travelling sales manager’s, salary and other costs, Wages/Salaries, , Time, devoted, department, , to, , each, , Depreciation, insurance, repairs and Value of assets of each, maintenance of capital assets, department otherwise on time, basis, , Administrative and other expenses, Time basis or equally among all, e.g., salaries of managers, directors, departments, common advertisement expenses, etc., Labour welfare expenses, PF/ESI contributions, , Number of employees in each, department, Wages and salaries of each, department, , Note: There are certain expenses and income, most being of financial nature, which, cannot be apportioned on a suitable basis; therefore, they are recognised in the combined, Profit and Loss Account, for example, interest on loan, profit/loss on sale of investment,, etc., © The Institute of Chartered Accountants of India

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12.6, , ACCOUNTING, , 5. TYPES OF DEPARTMENTS, There are two types of departments: Dependent and Independent Departments., , 5.1 Independent Departments, Departments which work independently of each other and have negligible interdepartment transfers are called Independent Departments., , 5.2 Dependent Departments, Departments which transfer goods from one department to another department for, further processing are called dependent departments. Here, the output of one, department becomes the input for the other department. These transfers may be done, at cost or some pre-decided selling price. The price at which this is done is known as, transfer price. In these departments, unloading is required if the transfer price is having, a profit element. The method of eliminating unrealised profit is being discussed in the, succeeding para., , 6. INTER-DEPARTMENTAL TRANSFERS, Whenever goods are transferred from or services are provided by one department to, another, their cost should be separately recorded and charged to the department, benefiting thereby and credited to that providing the goods or services. The totals of, such benefits (inter-departmental transfers) should be disclosed in the departmental, Profit and Loss Account, to distinguish them from other items of expenditure., , 6.1 Basis of Inter-Departmental Transfers, Goods and services may be charged by one department to another usually on either, of the following three bases:, (i), , Cost,, , (ii), , Current market price,, , (iii), , Cost plus agreed percentage of profit., , 6.2 Elimination of Unrealised Profit, When profit is added in the inter-departmental transfers the loading included in the, unsold inventory at the end of the year is to be excluded before final accounts are, prepared so as to eliminate any anticipatory yet unrealized (internal) profit included, therein., © The Institute of Chartered Accountants of India

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DEPARTMENTAL ACCOUNTS, , 12.7, , 6.3 Stock Reserve, Unrealised profit included in unsold stock at the end of accounting period is eliminated, by creating an appropriate stock reserve by debiting the combined Profit and Loss, Account. The amount of stock reserve will be calculated as:, Transfer price of unsold stock ×Profit included in transfer price, Transfer price, , 6.4 Journal Entry, At the end of the accounting year, the following journal entry will be passed for, elimination of unrealised profit (creation of stock reserve):, Profit and Loss Account, , Dr., , To Stock Reserve, (Being a provision made for unrealised profit included in closing stock), In the beginning of the next accounting year, the aforesaid journal entry will be, reversed as under:, Stock Reserve, , Dr., , To Profit and Loss Account, (Being provision for unrealised profit reversed.), , 6.5 Disclosure in Balance Sheet, The unsold closing stock acquired from another department will appear on the assets, side of the balance sheet as under: (An extract of the assets side of the balance sheet), Current assets, , xxx, , Stock, , xxx, , Less: Stock reserve, , xxx, xxx, , Illustration 1, Goods are transferred from Department P to Department Q at a price 50% above cost., If closing stock of Department Q is ` 27,000, compute the amount of stock reserve., , © The Institute of Chartered Accountants of India

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12.8, , ACCOUNTING, , Solution, `, Closing Stock of Department Q, Goods send by Department P to Department Q at a price 50% above, cost, , 27,000, , Hence profit of Department P included in the stock will be 27,000 ×50, =, 150, Amount of the Stock Reserve will be ` 9,000., , 9,000, , Working Note:, Dept P transfers goods to Dept Q at a profit of 50% of cost. Hence, if cost is ` 100/the profit = ` 50 and Transfer Price = ` 150. Therefore, the profit of Dept P included in, the stock value of Dept Q is one – third of the sale value, Illustration 2, Z Ltd. has three departments and submits the following information for the year ending, on 31st March, 20X1:, A, , B, , C, , Purchases (units), Purchases (Amount), , 6,000, , 12,000, , 14,400, , Closing Stock (Units), , 6,120, 40, , 600, , 11,520, 45, , 14,976, 50, , Sales (Units), Selling Price (per unit) `, , 960, , Total (`), 6,00,000, , 36, , You are required to prepare departmental trading account of Z Ltd., assuming that the, rate of profit on sales is uniform in each case., Solution, Departmental Trading Account for the year ended on 31st March, 20X1, Particulars, To Opening, (W.N.4), , Stock, , A, , B, , C Particulars, , A, , B, , C, , `, , `, , `, , `, , `, , `, , 11,520, , 8,640, , 12,240 By Sales, , A- 6120 x 40, , B- 11,520 x 45, , C- 14,976 x 50, , © The Institute of Chartered Accountants of India, , 2,44,800 5,18,400 7,48,800

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12.9, , DEPARTMENTAL ACCOUNTS, , To Purchases, (W.N.2), , 96,000 2,16,000 2,88,000 By Closing, (W.N.4), , Stock, , 9,600, , 17,280, , 720, , To Gross Profit (b.f.) 1,46,880 3,11,040 4,49,280, 2,54,400 5,35,680 7,49,520, , 2,54,400 5,35,680 7,49,520, , Working Notes:, (1), , Profit Margin Ratio, Selling price of unit purchased:, , `, , Department A, , 6,000 x 40, , 2,40,000, , Department B, , 12,000 x 45, , 5,40,000, , Department C, , 14,400 x 50, , 7,20,000, , Total Selling Price, , 15,00,000, , Less:, , (6,00,000), , Purchase (Cost) Value, , Gross Profit, Profit Margin Ratio =, (2), , 9,00,000, , 9,00,000, × 100 = 60%, 15,00,000, , Statement showing department-wise per unit Cost and Purchase Cost, , Selling Price (Per unit) (`), Less:Profit Margin @ 60% (`), , Profit Margin is uniform for all depts at 60%, Purchase price per unit (`), Number of units purchased, (Purchase cost per unit x Units purchased), , © The Institute of Chartered Accountants of India, , A, , B, , C, , `, , `, , `, , 40, , 45, , 50, , (24), , (27), , (30), , 16, , 18, , 20, , 6,000, , 12,000, , 14,400, , 96,000, , 2,16,000, , 2,88,000

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12.10, (3), , ACCOUNTING, , Statement showing calculation of department-wise Opening Stock (in, Units), A, B, 6,120, 11,520, 600, 960, 6,720, 12,480, (6,000) (12,000), 720, 480, , Sales (Units), Add:Closing Stock (Units), Less:Purchases (units), Opening Stock (Units), (4), , C, 14,976, 36, 15,012, (14,400), 612, , Statement showing department-wise cost of Opening Stock and Closing, Stock, Cost of Opening Stock (`), `, Cost of Closing Stock, `, , A, , B, , C, , 720 x 16, , 480 x 18, , 612 x 20, , 11,520, , 8,640, , 12,240, , 600 x 16, , 960 x 18, , 36 x 20, , 9,600, , 17,280, , 720, , Illustration 3, M/s Omega is a departmental store having three departments X, Y and Z. The, information regarding three departments for the year ended 31st March, 20X1 are given, below:, X, , Y, , Z, , `, , `, , `, , 36,000, , 24,000, , 20,000, , 1,32,000, , 88,000, , 44,000, , 15,000, , 10,000, , 10,000, , 1,80,000, , 1,35,000, , 90,000, , Closing stock, , 45,000, , 17,500, , 21,000, , Value of furniture in each department, , 20,000, , 20,000, , 10,000, , 3,000, , 2,500, , 2,000, , 25, , 20, , 15, , 300, , 200, , 100, , Opening Stock, Purchases, Debtors at end, Sales, , Floor space occupied by each department (in sq. ft.), Number of employees in each Department, Electricity consumed by each department (in units), © The Institute of Chartered Accountants of India

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DEPARTMENTAL ACCOUNTS, , 12.11, , The balances of other revenue items in the books for the year are given below:, Carriage inwards, , Carriage outwards, Salaries, , Advertisement, Discount allowed, , Discount received, Rent, Rates and Taxes, , Depreciation on furniture, Electricity expenses, , Labour welfare expenses, , Amount (`), 3,000, 2,700, , 48,000, , 2,700, 2,250, 1,800, 7,500, 1,000, 3,000, 2,400, , You are required to prepare Departmental Trading and Profit and Loss Account for the, year ended 31st March, 20X1 after providing provision for Bad Debts at 5%., , © The Institute of Chartered Accountants of India

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Particulars, , 46,500, 1,11,000, 600, 500, 12,000, 600, 500, 2,000, 200, 500, 600, , 400, 500, 800, , © The Institute of Chartered Accountants of India, 16,350, 40,100, , 2,400, , 1,000, 1,750, , 56,400, , 1,41,500, ________, 4,88,500, 2,25,000, 2,700 By Gross Profit b/d, 55,500, 3,000 By Discount received, 900, 48,000, 2,700, 2,250, 7,500, , 1,80,000, 45,000, , `, , Particulars Deptt.X, , 80,000 By Sales, 2,64,000 By Stock (closing), 3,000, , `, , Total, , 29,300, 72,000, 46,800 1,43,300, , 20,000, 44,000, 500, , 39,500, 1,52,500, 900, 1,000, 16,000, 900, 750, 2,500, , 24,000, 88,000, 1,000, , `, , `, , `, , Deptt.Z, , Deptt.Y, , Deptt.X, , 40,100, , _________, 1,52,500, 39,500, 600, , 1,35,000, 17,500, , `, , Deptt.Y, , 46,800, , ________, 1,11,000, 46,500, 300, , 90,000, 21,000, , `, , Deptt.Z, , 1,43,300, , ________, 4,88,500, 1,41,500, 1,800, , 4,05,000, 83,500, , `, , Total, , Departmental Trading & Profit and Loss Account for the year ended 31st March, 20X1, in Books of M/s Omega, , To Stock (opening), 36,000, To Purchases, 1,32,000, To Carriage Inwards, 1,500, To Gross Profit c/d, (b.f.), 55,500, 2,25,000, To Carriage Outwards, 1,200, To Electricity, 1,500, To Salaries, 20,000, To Advertisement, 1,200, To Discount allowed, 1,000, To Rent, Rates and, 3,000, Taxes, To Depreciation, 400, To Provision for Bad, 750, Debts @ 5% of, debtors, To Labour welfare, 1,000, expenses, To Net Profit (b.f.), 26,350, 56,400, , Solution, , 12.12, ACCOUNTING

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12.13, , DEPARTMENTAL ACCOUNTS, Working Note:, Carriage inwards, , Basis of allocation of expenses, , Carriage outwards, Salaries, , Advertisement, , Discount allowed, , Discount received, , Rent, Rates and Taxes, , Depreciation on furniture, Labour welfare expenses, Electricity expense, , Provision for bad debts, , Purchases (3:2:1), Turnover (4:3:2), , No. of Employees (5:4:3), Turnover (4:3:2), Turnover (4:3:2), , Purchases (3:2:1), , Floor Space occupied (6:5:4), Value of furniture (2:2:1), , No. of Employees (5:4:3), Units consumed (3:2:1), , 5% of respective debtors balance, , Illustration 4, M/s X has two departments, A and B. From the following particulars prepare the, consolidated Trading Account and Departmental Trading Account for the year ending, 31st December, 20X1:, A, , B, , `, , `, , Opening Stock [consisting of purchased goods -at cost], , 20,000, , 12,000, , Purchases, , 92,000, , 68,000, , Sales, , 1,40,000 1,12,000, , Wages, Carriage, , 12,000, , 8,000, , 2,000, , 2,000, , 4,500, , 6,000, , 24,000, , 14,000, , Closing Stock:, (i), , Purchased goods, , (ii), , Finished goods, , Purchased goods transferred:, by B to A, © The Institute of Chartered Accountants of India, , 10,000

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12.14, , ACCOUNTING, , by A to B, , 8,000, , Finished goods transferred:, by A to B, , 35,000, , by B to A, , 40,000, , Return of finished goods:, by A to B, , 10,000, , by B to A, , 7,000, , You are informed that purchased goods have been transferred mutually at their, respective departmental purchase cost and finished goods at departmental market price, and that 20% of the finished stock (closing) at each department represented finished, goods received from the other department., Solution, M/s X, Departmental Trading A/c for the year ending 31st December, 20X1, Deptt., A., , Deptt., B, , Deptt., A, , Deptt., B, , `, , `, , `, , `, , 1,40,000, , 1,12,000, , To, , Stock, , 20,000, , 12,000, , By, , Sales, , To, , Purchases, , 92,000, , 68,000, , By, , Purchased, transferred, , Goods, , 8,000, , 10,000, , To, , Wages, , 12,000, , 8,000, , By, , Finished, transferred, , goods, , 35,000, , 40,000, , To, , Carriage, , 2,000, , 2,000, , Return of finished, Goods, , 10,000, , 7,000, , To, , Purchased, Goods, , 4,500, , 6,000, , 24,000, , 14,000, , By, , transferred, , 10,000, , 8,000, , To, , Finished, Goods, transferred, , 40,000, , 35,000, , To, , Return, finished, Goods, , 7,000, , 10,000, , of, , © The Institute of Chartered Accountants of India, , Closing Stock:, Purchased Goods, Finished Goods

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12.15, , DEPARTMENTAL ACCOUNTS, To, , Gross profit, c/d (b.f.), , 38,500, , 46,000, , 2,21,500, , 1,89,000, , 2,21,500, , 1,89,000, , Consolidated Trading Account for the year ending 31st December, 20X1, `, To, , Opening Stock, , To, , Wages, , To, To, To, To, , Purchases, , 32,000 By Sales, , 1,60,000 By Closing Stock:, 20,000, , Carriage, , Stock Reserve, , Gross Profit c/d, , `, , 4,000, 2,196, , 2,52,000, , Purchased Goods, , 10,500, , Finished Goods, , 38,000, , 82,304, 3,00,500, , 3,00,500, , Working note:, Sale, Add: Transfer, Less: Returns, Net Sales plus Transfer, Rate of Gross profit, , Deptt. A, , Deptt. B, , 1,40,000, , 1,12,000, , 35,000, , 40,000, , 1,75,000, , 1,52,000, , (7,000), , (10,000), , 1,68,000, , 1,42,000, , 38,500, ×100 = 22.916%, 1,68,000, , Closing Stock out of transfer, , 46,000, ×100 = 32.394%, 1,42,000, , 4,800, , 2,800, , (20% of closing stock), Unrealised Profit, , 4,800 × 32.394% = 1,555, , 2,800 × 22.916% = 641, , Illustration 5, Department P sells goods to Department S at a profit of 25% on cost and to Department, Q at a profit of 15% on cost. Department S sells goods to P and Q at a profit of 20% and, 30% on sales respectively. Department Q sells goods to P and S at 20% and 10% profit, on cost respectively., © The Institute of Chartered Accountants of India

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12.16, , ACCOUNTING, , Departmental Managers are entitled to 10% commission on net profit subject to, unrealised profit on departmental sales being eliminated. Departmental profits after, charging Manager's commission, but before adjustment of unrealised profits are as, below:, , `, Department P, , 90,000, , Department S, , 60,000, , Department Q, , 45,000, , Stock lying at different Departments at the end of the year are as below:, , P, -, , Transfer from P, , Transfer from S, Transfer from Q, , DEPARTMENTS, , Figures in `, , S, 18,000, , 48,000, 12,000, , Q, 14,000, , 8,000, , 38,000, -, , Find out correct Departmental Profits after charging Managers' Commission., Solution, Calculation of correct Departmental Profits, , Profit after charging Manager’s, Commission, , Department, P (`), 90,000, , 60,000, , 45,000, , 10,000, , 6,667, , 5,000, , 1,00,000, , 66,667, , 50,000, , Add: Manager’s Commission (1/9), , Less: Unrealised profit on Stock, (WN), , Department Department, S (`), Q (`), , (5,426), , (21,000), , (2,727), , 94,574, , 45,667, , 47,273, , Profit, Before, Commission, , Manager’s, , Less: Manager’s Commission 10%, , (9,457), , (4,567), , (4,727), , Correct Profit, Commission, , Manager’s, , 85,117, , 41,100, , 42,546, , after, , © The Institute of Chartered Accountants of India

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12.17, , DEPARTMENTAL ACCOUNTS, , Working Notes:, Department P, (`), , Department S, (`), , Department Q, (`), , Total, (`), , Department P, , -, , Department S, , 20/100X48,000, =9,600, , 25/125X18,000, =3,600, , 15/115X14,000, =1,826, , 5,426, , Unrealised, of:, , Profit, , Department Q, , 20/120X12,000, =2,000, , -, , 10/110X8,000, =727, , 30/100X38,000, =11,400, , 21,000, 2,727, , Illustration 6, M/s. Suman Enterprises has two Departments, Finished Leather and Shoes. Shoes are, made by the Firm itself out of leather supplied by Leather Department at its usual, selling price. From the following figures, prepare Departmental Trading and Profit &, Loss Account for the year ended 31st March, 20X3:, , Opening Stock (As on 01.04.20X2), , Finished Leather, Department, (`), , Shoes Department, , 1,50,00,000, 1,80,00,000, , 2,60,000, 45,20,000, , 1,50,000, , 60,000, , Purchases, Sales, , Transfer to Shoes Department, Manufacturing Expenses, Selling Expenses, , Rent and Warehousing, Stock on 31.03.20X3, , 30,20,000, , 30,00,000, -, , 5,00,000, 12,20,000, , (`), , 4,30,000, , 5,00,000, 3,00,000, 5,00,000, , The following further information are available for necessary consideration:, (i), , The stock in Shoes Department may be considered as consisting of 75% of, Leather and 25% of other expenses., , (ii), , The Finished Leather Department earned a Gross Profit @ 15% in 20X1-X2., , (iii), , General expenses of the business as a whole amount to ` 8,50,000., , © The Institute of Chartered Accountants of India

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12.18, , ACCOUNTING, , Solution, Departmental Trading and Profit and Loss Account, for the year ended 31st March, 20X3, Particulars, , To Opening stock, To Purchases, , Finished, leather, (`), , Shoes, , 30,20,000, , 4,30,000, , 1,50,00,000, , To Transfer from, Leather, Department, To Manufacturing, expenses, , To Gross profit, c/d (b.f.), To Selling, expenses, , To Rent &, warehousing, To Net profit, (b.f.), , (`), , (`), , 34,50,000 By Sales, , 2,60,000 1,52,60,000 By Transfer, to, shoes, Deptt., , 30,00,000, , 42,00,000, , Total Particulars, , 30,00,000 By Closing, stock, , 5,00,000, , 5,00,000, , 8,30,000, , 50,30,000, , 2,22,20,000 50,20,000 2,72,40,000, 1,50,000, , 60,000, , 5,00,000, , 3,00,000, , 35,50,000, , 4,70,000, , 42,00,000, , 8,30,000, , 2,10,000 By, Gross, profit b/d, , Finished, leather, (`), 1,80,00,000, , (`), , (`), , -, , 12,20,000, , 42,00,000, , Total, , 45,20,000 2,25,20,000, , 30,00,000, , 2,22,20,000, , Shoes, , 30,00,000, , 5,00,000, , 17,20,000, , 50,20,000 2,72,40,000, 8,30,000, , 50,30,000, , 8,30,000, , 50,30,000, , 8,00,000, 40,20,000, 50,30,000, , 42,00,000, , General Profit and Loss Account, , Particulars, To General expenses, To Unrealised profit (Refer W.N.), To General net profit (Bal. fig.), , Amount, (`), , Particulars, , 8,50,000 By Net profit, 26,625, 31,43,375, 40,20,000, , Amount, (`), , 40,20,000, , 40,20,000, , Working Note:, Calculation of Stock Reserve, Rate of Gross Profit of Finished leather Department, for the year 20X2-X3, =, , Gross Profit, x 100 = [(42,00,000)/ (1,80,00,000 + 30,00,000)] x100 = 20%, Total Sales, , © The Institute of Chartered Accountants of India

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DEPARTMENTAL ACCOUNTS, , 12.19, , Closing Stock of Finished leather in Shoes Department = 75%, i.e. ` 5,00,000 x 75% = ` 3,75,000, Stock Reserve required for unrealised profit @ 20% on closing stock, ` 3,75,000 x 20% = ` 75,000, Stock reserve for unrealised profit included in opening stock of Shoes dept. @ 15%, i.e. (` 4,30,000 x 75% x 15%) = ` 48,375, Additional Stock Reserve required during the year = ` 75,000 – ` 48,375 =, ` 26,625, , 7. MEMORANDUM STOCK AND MEMORANDUM, MARK UP ACCOUNT METHOD, This method is generally used to have an appropriate control on stock movement, of various departments. Please note that the departments prepare only, memorandum accounts and hence these are just control accounts. Under this, method every department maintains:, •, , A Memorandum Stock Account which records all stock movements:, opening balance, purchases, stock transfers, shortages and sales. It is, prepared at selling price (i.e. even the purchases and opening / closing, balances are adjusted by adding the mark-up), and, , •, , A Memorandum Mark-up Account which is prepared for loading or markup on cost (selling price – cost price) in the memorandum stock account., , Various accounting adjustments that are required to be made under this method, are as follows:1., , Opening stock is recorded on the debit side of the Memorandum Stock A/c, at selling price (Cost + Mark-up) and the respective Mark-Up is noted on the, credit side of the Mark-Up Account. Accordingly, any Mark-down (lowering, of cost) will have reverse impact., , 2., , Similarly, any purchases (debit) or stock transfers (debit or credit) are also, recorded at selling price itself in the Memorandum Stock Account and its, corresponding mark-up is recorded in the Memorandum Mark-up A/c., , © The Institute of Chartered Accountants of India

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12.20, , ACCOUNTING, , 3., , Any sales are credited to the Memorandum Stock A/c and they are anyways, at selling price and hence no loading is required and no mark-up is required, to be noted in the Mark-up A/c accordingly., , 4., , Any theft or shortage or loss of stock is also credited to the Memorandum, Stock A/c at its cost-plus mark-up i.e. at selling price and the corresponding, mark-up is debited to the Memorandum Mark-up Account., , 5., , Management may decide to make an ad-hoc amount of mark up on any of, the stock and accordingly the adjustment has to be recorded in both the, memorandum accounts. Similarly, if the selling price of any goods is reduced, below its normal selling price, the reduction ‘marked down’ is adjusted both, in the Stock Account and the Departmental Mark-up Account., , 6., , At the end of the period, mark-up on the closing stock (which shall be the, balancing figure of Memorandum Stock A/c) is also recorded in the, Memorandum Mark-up A/c. Accordingly, the balance remaining in the Markup A/c should reflect profit or loss for the period (which can also be verified, by calculating the mark-up % on sales)., , Illustration 7, Gram Udyog, a retail store, has two departments, ‘Khadi and Silks’ for each of which, stock account and memorandum ‘mark up’ accounts are kept. All the goods supplied, to each department are debited to the stock account at cost plus a ‘mark up’, which, together make-up the selling-price of the goods and the sale proceeds of the goods, are credited in the account. The amount of ‘mark-up’ is credited to the, Departmental Mark up Account. If the selling price of any goods is reduced below, its normal selling price, the reduction ‘marked down’ is adjusted both in the Stock, Account and the Departmental ‘Mark up’ Account. The rate of ‘Mark up’ for Khadi, Department is 33-1/3% of the cost and for Silks Department it is 50% of the cost., The following figures have been taken from the books for the year ended December, 31, 20X1:, Khadi Deptt., , Silks Deptt., , `, , `, , Stock as on January 1st at cost, , 10,500, , 18,600, , Purchases, , 75,900, , 93,400, , Sales, , 95,600, , 1,25,000, , © The Institute of Chartered Accountants of India

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12.21, , DEPARTMENTAL ACCOUNTS, (1), , The stock of Khadi on January 1, 20X1 included goods the selling price of which, had been marked down by ` 1,260. These goods were sold during the year at, the reduced prices., , (2), , Certain stock of the value of ` 6,900 purchased for the Khadi Department were, later in the year transferred to the Silks department and sold for ` 10,350. As a, result, though cost of the goods is included in the Khadi Department the sale, proceeds have been credited to the Silks Department., , (3), , During the year 20X1 to promote sales the goods were marked down as follows:, , Khadi, Silk, , Cost, , Marked down, , `, , `, , 5,600, , 360, , 10,000, , 2,000, , All the goods that were marked down were sold except those with Silks of the, value worth ` 5,000 (that were marked down by ` 1,000)., (4), , At the time of stock-taking on December 31, 20X1 it was discovered that Khadi, cloth of the cost of ` 390 was missing and it was decided that the amount be, written off., , You are required to prepare for both the departments for the year 20X1., (a), , The Memorandum Stock Account;, , (b), , The Memorandum Mark up Account;, , (c), , Extract of Profit and Loss Account., , Solution, Silk Stock Account, 20X1, , To Balance b/d:, Cost, , Mark-up @50%, , To Purchases, , ` 20X1, 18,600, , 9,300, , 93,400, , By Sales A/c, By P& L A/c, , 27,900 By Balance c/d, , © The Institute of Chartered Accountants of India, , `, 1,25,000, 1,000, 52,350

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12.22, , ACCOUNTING, , Mark-up @50%, , 46,700 1,40,100, , To Khadi Deptt. (ts/f), , 6,900, , Mark-up@50%, , 3,450, , 10,350, 1,78,350, , 1,78,350, , Silk Mark-up Account, 20X1, , ` 20X1, , `, , By Balance b/d, , To Profit & Loss A/c (bal.fig.), , To Balance c/d [1/3* of 52,350], , 9,300, , 42,000 By Silk Stock A/c, , 46,700, , 59,450, , 59,450, , 17,450 By Silk Stock A/c, , 3,450, , * 1/2 on cost is equal to 1/3 on sales, Khadi Stock Account, 20X1, To, , `, , ` 20X1, , To Balance b/d:, , By Sales, , Cost, , Mark up @ 33-1/3%, , `, 95,600, , 10,500, , Mark-up @ 33-1/3%, To Purchases, , `, , 3,500, , 14,000 By Silk Dept. (ts/f), , 75,900, , 6,900, , Mark-up A/c @ 331/3%, 2,300, , 25,300 1,01,200 By Loss of stock A/c, Mark-up A/c @ 331/3%, , 9,200, , 390, 130, , 520, , By P&L A/c, , 1,620, , By Balance c/d (b.f.), , 8,260, , 1,15,200, , 1,15,200, , Khadi Mark-up Account, 20X1, To, , Stock A/c (transfer), , To, , Profit & Loss A/c (bal.fig), , To, To, , Stock A/c (Loss of stock), Balance (1/4 of ` 8,260), , ` 20X1, , 2,300, , 130, , 24,305, , 2,065, , 28,800, , © The Institute of Chartered Accountants of India, , By Balance b/d, , By Khadi Stock A/c, , `, 3,500, , 25,300, , 28,800

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DEPARTMENTAL ACCOUNTS, , 12.23, , Profit and Loss Account (Extract), 20X1, , To Khadi Stock A/c, To Silk Stock A/c, , ` 20X1, , 1,620 By Khadi Mark up A/c, 1,000 By Silk Mark up A/c, , `, 24,305, , 42,000, , SUMMARY, •, , •, , Aspects of Departmental Accounting, (i), , Computation of unrealised profit if inter-department transfers form, part of closing stock., , (ii), , Preparation of departmental trading and profit and loss account., , (iii), , Monitoring stock movements with help of memorandum stock and, mark-up accounts., , Methods of maintaining departmental accounts, There are two methods of keeping departmental accounts:, (i), , When accounts of all departments are kept at in one book only, , (ii), , When separate set of books are kept for each department., , •, , Classification of Departments: (i) Dependent departments and (ii) Independent, departments., , •, , Basis of allocation of departmental expenses:, S.No. Expenses, 1., 2., 3., 4., 5., 6., , Rent, rates and taxes,, repairs and maintenance,, insurance of building, Lighting, and, Heating, expenses, , Basis, , Floor, area, occupied, by, each, department (if given) otherwise on time, basis, Consumption of energy by each, department, , Selling expenses,, Sales of each department, Carriage inward/ Discount Purchases of each department, received, Wages/Salaries, Maintenance of, assets, , Time devoted to each department, capital Value of assets of each department, otherwise on time basis, , © The Institute of Chartered Accountants of India

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12.24, , ACCOUNTING, , 7., , Administrative expenses, , 8., , Labour welfare expenses, , 9., , PF/ESI contributions, , Time basis or equally among all, departments, Number of, department, , employees, , in, , each, , Wages and salaries of each department, , •, , There are certain expenses and income, most being of financial nature, which, cannot be apportioned on a suitable basis; therefore, they are recognised in the, combined Profit and Loss Account, for example, interest on loan, profit/loss on, sale of investment, etc., , •, , Goods and services may be charged by one department to another usually on, any of the three basis: (i) Cost, (ii) Current market price, (iii) Cost plus, percentage of profit., , •, , When profit is added in the inter-departmental transfers, the loading included, in the unsold stock at the end of the year is to be excluded before final accounts, are prepared so as to eliminate any anticipatory or unrealized profit included, therein. This is done by creating an appropriate stock reserve by debiting the, combined Profit and Loss Account., , © The Institute of Chartered Accountants of India

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DEPARTMENTAL ACCOUNTS, , 12.25, , TEST YOUR KNOWLEDGE, MCQs, 1., , 2., , 3., , 4., , 5., , Departmental accounting helps in, (a), , Evaluation of trading results of each department separately., , (b), , Effective planning and control on each department., , (c), , Both (a) and (b), , Selling commission expense is apportioned among departments in the, proportion of, (a), , Average stock carried by each department., , (b), , Number of units sold by each department., , (c), , Sales of each department., , If Department A transfers goods to Department B at a price of 50% above, cost, what will be the amount of stock reserve on unsold stock worth `9,000, of Department B?, (a), , 3,000., , (b), , 4,500., , (c), , 1,500., , Goods and services may be charged by one department to another on, (a), , Market price., , (b), , Cost plus agreed percentage of profit., , (c), , Both (a) and (b), , Administrative expenses are apportioned among various departments on, basis of, (a), , Time spent by employees in each department., , (b), , Value of assets of each department., , (c), , Sales of each department., , © The Institute of Chartered Accountants of India

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12.26, 6., , 7., , 8., , 9., , 10., , ACCOUNTING, , Depreciation on assets is apportioned among various departments on basis, of, (a), , Value of assets of each department., , (b), , Purchases of each department., , (c), , Sales of each department., , Expense of rent is apportioned among various departments on basis of, (a), , Sales of each department., , (b), , Floor area occupied by each department., , (c), , Either (a) or (b)., , When profit is added in inter-departmental transfers, unrealised profit, included in the closing stock at the year end (before preparing final accounts), is eliminated by, (a), , Creating an appropriate stock reserve., , (b), , Debiting the combined profit and loss account., , (c), , Both (a) and (b)., , If an organisation is interested in determining the separate departmental net, profit, then, (a), , Accounts of all departments are kept in one book only., , (b), , Separate set of books are kept for each department., , (c), , Departments transfer goods to each other for further processing., , M/s XYZ is a departmental Store having 2 departments A and B. M/s XYZ paid, ` 4,00,000/- towards interest on loan (loan taken for the business). Please, advise the basis of allocation of interest expenses between the departments., (a), , Allocated on basis of Sales of each department., , (b), , Allocated on basis of value of assets of each department., , (c), , Not allocated to individual department, recognized in the combined, Profit and Loss account., , © The Institute of Chartered Accountants of India

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12.27, , DEPARTMENTAL ACCOUNTS, 11., , 12., , Which of the following is not the one of the basis generally used by, departments to make the inter-departmental transfer of goods:, (a), , Cost, , (b), , Cost plus % of profit, , (c), , Variable Cost, , Which of the following expenses may not be proportioned amongst the, departments using any suitable basis:, (a), , Carriage Inward, , (b), , Profit on Sale of Investments, , (c), , Labour welfare expenses, , Theoretical Questions, 1., , Explain the significance of having departmental accounts for a business, entity., , 2., , How will you allocate the following expenses among different departments?, (i), , Rent, rates and taxes, repairs and maintenance, insurance of building., , (ii), , Lighting and Heating expenses (e.g. energy expenses), , (iii), , Selling expenses., , Practical Problems, Question 1, Department A sells goods to Department B at a profit of 50% on cost and to, Department C at 20% on cost. Department B sells goods to A and C at a profit of 25%, and 15% respectively on sales. Department C charges 30% and 40% profit on cost to, Department A and B respectively., Stock lying at different departments at the end of the year are as under:, , Transfer from Department A, Transfer from Department B, Transfer from Department C, , Department A, `, , Department B, `, , Department C, `, , 40,000, , 45,000, -, , 42,000, 72,000, , 39,000, , 42,000, , Calculate the unrealised profit of each department and also total unrealised profit., © The Institute of Chartered Accountants of India, , -

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12.28, , ACCOUNTING, , Question 2, Department X sells goods to Department Y at a profit of 25% on cost and to, Department Z at 10% profit on cost. Department Y sells goods to X and Z at a profit of, 15% and 20% on sales, respectively. Department Z charges 20% and 25% profit on cost, to Department X and Y, respectively. Department Managers are entitled to 10%, commission on net profit subject to unrealized profit on departmental sales being, eliminated. Departmental profits after charging Managers’ commission, but before, adjustment of unrealized profit are as under:, `, Department X, , 36,000, , Department Y, , 27,000, , Department Z, , 18,000, , Stock lying at different departments at the end of the year are as under:, Dept. X, , Dept. Y, , Dept. Z, , `, , `, , `, , Transfer from Department X, , —, , 15,000, , 11,000, , Transfer from Department Y, , 14,000, , —, , 12,000, , Transfer from Department Z, , 6,000, , 5,000, , —, , Find out the correct departmental Profits after charging Managers’ commission., Question 3, A firm has two departments--Sawmill and Furniture. Furniture is made with wood, supplied by the Sawmill department at its usual selling price. From the following, figures prepare Departmental Trading and Profit and Loss Account for the year 20X2:, Sawmill, Opening Stock on1st January, 20X2, Sales, , Purchases, , Supply to Furniture Department, Selling expenses, , © The Institute of Chartered Accountants of India, , Furniture, , `, , `, , 1,50,000, , 25,000, , 12,00,000, , 2,00,000, , 1,50,000, , --, , 10,00,000, , 10,000, , 7,500, 3,000

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12.29, , DEPARTMENTAL ACCOUNTS, Wages, , Stock on 31st December, 20X2, , 30,000, , 1,00,000, , 10,000, , 30,000, , The value of stocks in the furniture department consist of 75 per cent wood and 25, per cent other expenses. The Sawmill Department earned Gross Profit at 15 per, cent in 20X1. General expenses of the business as a whole came to ` 55,000., Question 4, Martis Ltd. has several departments. Goods supplied to each department are debited, to a Memorandum Departmental Stock Account at cost, plus a fixed percentage (markup) to give the normal selling price. The mark-up is credited to a memorandum, departmental 'Mark-up account', any reduction in selling prices (mark-down) will, require adjustment in the stock account and in mark-up account. The mark up for, Department A for the last three years has been 25%. Figures relevant to Department A, for the year ended 31st March, 20X2 were as follows:, Opening stock as on 1st April, 20X1, at cost, , `, , 65,000, , Purchase at cost, , ` 2,00,000, , Sales ` 3,00,000, It is further ascertained that :, (1), , Shortage of stock found in the year ending 31.03.20X2, costing ` 1,000 were, written off., , (2), , Opening stock on 01.04.20X1 including goods costing ` 6,000 had been sold, during the year and bad been marked down in the selling price by ` 600. The, remaining stock had been sold during the year., , (3), , Goods purchased during the year were marked down by ` 1,200 from a cost of, ` 15,000. Marked-down stock costing ` 5,000 remained unsold on 31.03.20X2., , (4), , The departmental closing stock is to be valued at cost subject to adjustment for, mark-up and mark-down., , You are required to prepare:, (i), , A Departmental Trading Account for Department A for the year ended 31st, March, 20X2 in the books of Head Office., , (ii), , A Memorandum Stock Account for the year., , (iii), , A Memorandum Mark-up Account for the year., , © The Institute of Chartered Accountants of India

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12.30, , ACCOUNTING, , ANSWERS/ SOLUTIONS, MCQs, 1., 7., , (c), (b), , 2., 8., , (c), (c), , 3., 9., , (a), (b), , 4., 10., , (c), (c), , 5., 11., , (a), (c), , 6., 12., , (a), (b), , Theoretical Questions, 1., , The main advantages of departmental accounting are:, (i), , Evaluation of performance;, , (ii), , Growth potential of each department, , (iii), , Justification of capital outlay;, , (iv), , Judgement of efficiency and, , (v), , Planning and control., , 2., S. No., , Expenses, , 2., , Lighting, and, expenses (e.g.,, expenses), , 1., , 3., , Basis, , Rent, rates and taxes, Floor area occupied by each, repairs and maintenance, department (if given) otherwise on, insurance of building, time basis, Heating Consumption of energy by each, energy department, , Selling expenses, , Sales of each department, , Practical Problems, 1., , Calculation of unrealised profit of each department and total unrealised, profit, , Unrealised Profit, of:, Department A, , Dept. A, , Dept. B, , Dept. C, , Total, , `, , `, , `, , `, , 45,000 x 50/150 42,000 x 20/120, = 15,000, = 7,000 22,000, , © The Institute of Chartered Accountants of India

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DEPARTMENTAL ACCOUNTS, Department B, Department C, , 2., , 40,000 x .25, = 10,000, , 39,000 x 30/130 42,000 x 40/140, = 9,000, = 12,000, , 12.31, , 72,000 x .15, = 10,800 20,800, 21,000, 63,800, , Calculation of correct Profits, Department Department, X, Y, Profit after charging managers’, commission, Add, , Less:, , back:, Managers’, commission (1/9), , `, , `, , `, , 36,000, , 27,000, , 18,000, , 4,000, , 3,000, , 2,000, , 40,000, , 30,000, , 20,000, , Unrealised profit, stock (Working Note), , on, , (4,000), , (4,500), , (2,000), , Manager’s, , 36,000, , 25,500, , 18,000, , Commission, Department, , for, (3,600), , (2,550), , (1,800), , Profit, before, commission, Less:, , Department, Z, , Manager @ 10%, , Departmental, Profits, manager’s commission, , after, , 32,400, , 22,950, , 16,200, , Working Note:, Stock lying with, Dept. X, , Dept. Y, , Dept. Z, , Total, , `, , `, , `, , `, , 1/5×15,000, =3,000, , 1/11×11,000, =1,000, , 4,000, , Unrealised Profit, of:, Department X, , © The Institute of Chartered Accountants of India

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12.32, , ACCOUNTING, , Department Y, , 0.15×14,000, =2,100, , Department Z, , 1/6×6,000 =1,000, , 3., , 0.20×12,000, , 4,500, , =2,400, , 1/5×5,000, =1,000, , 2,000, , Department Trading and Profit and Loss Account, Particulars, , Saw mill, , Furniture, , `, , `, , To opening, stock, , 1,50,000, , 25,000, , To purchase, , 10,00,000, , 7,500, , By transfer to, furniture dept., , 1,50,000, , 30,000, , 10,000, , By Closing stock, , 1,00,000, , 30,000, , To transfer, from, saw, mill, , -, , 1,50,000, , To, gross, profit, , 2,70,000, , 37,500, , 14,50,000, , 2,30,000, , 14,50,000, , 2,30,000, , To, selling, expenses, , 10,000, , 3,000, , 2,70,000, , 37,500, , To Net Profit, , 2,60,000, , 34,500, , 2,70,000, , 37,500, , 2,70,000, , 37,500, , To wages, , Particulars, By sales, , By Gross Profit, , Saw mill, , Furniture, , `, , `, , 12,00,000, , 2,00,000, , General Profit & Loss Account, Particulars, , To general Expenses, , To stock reserve (WN2), To Net Profit, , Amount ` Particulars, , 55,000 By Net Profit from, Saw Mill, , Furniture, , 4,500 By stock reserve, (opening WN-1), , Amount `, 2,60,000, , 34,500, 2,813, , 2,37,813, 2,97,313, , © The Institute of Chartered Accountants of India, , 2,97,313

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DEPARTMENTAL ACCOUNTS, , 12.33, , Working Notes:, 1., , Calculation of Stock Reserve (opening), assuming FIFO, ` 25,000 x 75% wood x 15% = ` 2,813, , 2., , Calculation of closing stock reserve, Gross Profit Rate of Saw Mill of 20X2:, ` 2,70,000 / (12,00,000 + 1,50,000) x 100 = 20%, ` 30,000x 75% x 20% = ` 4,500, , 4., , (i), , Department Trading Account, For the year ending on 31.03.20X2 in the books of Head Office, Particulars, , ` Particulars, , To Opening Stock, , 65,000 By Sales, , To Purchases, , 2,00,000 By Shortage, , To Gross Profit c/d (b.f.), (ii), , 58,880 By Closing Stock, , 3,23,880, , `, 3,00,000, , 1,000, , 22,880, , 3,23,880, , Memorandum stock account (for Department A) (at selling price), , Particulars, , ` Particulars, , To Balance b/d, , (` 65,000 + 25% of ` 65,000), , To Purchases, , (` 2,00,000, ` 2,00,000), , +, , 25%, , of, , 81,250 By, , Profit & Loss A/c, , (Cost of Shortage), , `, 1,000, , 2,50,000 By, , Memorandum, Departmental, Mark-up A/c (Load, on Shortage), (` 1,000 x 25%), , 250, , By, , Memorandum, Departmental, Mark-up A/c, (Mark-down on, Current Purchases), , 1,200, , By, , Debtors A/c (Sales), , 3,00,000, , © The Institute of Chartered Accountants of India

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12.34, , ACCOUNTING, , By Memorandum, Departmental, Mark-up, A/c(Mark, Down on, Opening, Stock), By, , Balance c/d (b.f.), , 3,31,250, , (iii), , 600, , 28,200, 3,31,250, , Memorandum Departmental Mark-up Account, Particulars, , To Memorandum, Departmental Stock A/c, (` 1,000 × 25/100), To Memorandum, Departmental Stock A/c, , To Memorandum, Departmental Stock A/c, To Gross Profit transferred, to Profit & Loss A/c, , To Balance c/d [(` 28,200, + 400*) x 25/125 - ` 400], , ` Particulars, , 250 By Balance b/d, , (` 81,250 x 25/125), , 1,200 By Memorandum, Departmental Stock, A/c, 600, , `, 16,250, , 50,000, , (` 2,50,000 x 25/125), , 58,880, , 5,320, 66,250, , *[` 1,200 ×5,000/15,000] = ` 400, , 66,250, , Working Notes:, (i), , Calculation of Cost of Sales, , `, A, , Sales as per Books, , C, , Add: mark-down in sales out of current Purchases, , B, , Add: Mark-down in opening stock (given), (` 1,200 x 10,000 /15,000), , © The Institute of Chartered Accountants of India, , 3,00,000, , 600, 800

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DEPARTMENTAL ACCOUNTS, D, E, F, (ii), , Value of sales if there was no mark-down (A+B+C), , 12.35, , Less: Gross Profit (25/125 of ` 3,01,400) subject to, Mark Down (` 600 + ` 800), Cost of sales (D-E), , 3,01,400, (60,280), , 2,41,120, , Calculation of Closing Stock, , `, A, B, , Opening Stock, Add: Purchases, , D, E, , Less: Shortage, Closing Stock (A+B-C-D), , C, , Less: Cost of Sales, , 65,000, 2,00,000, , (2,41,120), , (1,000), 22,880, , Note: It has been assumed that mark up (given in question) is determined, as a percentage of cost., , © The Institute of Chartered Accountants of India