What is a Departmental Accounting System?

Definition: A departmental accounting system is an accounting information

system that records the activities and financial information about the department.
Managers can use the financial information from the departmental accounting
system to tell how profitable and efficient each department is.
What Does Departmental Accounting System Mean?
Larger corporations can’t be properly accounted for with one single, centralized
accounting system. That is why the corporation is divided into many different
departments like the shipping and receiving department, sales department, and
manufacturing department. Many companies also departmentalize based on
products.

Each one of these departments has its own accounting system to keep track of
revenues and expenses. These accounting systems also provide useful efficiency
ratios for management. Managers can use these ratios to evaluate the
departments and consider merging departments or getting rid of some
departments altogether.

The departmental stores are the example of large scale retail selling just under a
single roof. Different departments are involved for different goods to be sold out.
To calculate the net result of the whole organization, a full fledged trading and
profit and loss account is to be prepared. But to evaluate individual department, it
will be credit worthy to prepare individual trading and profit and loss account.
Such individual accounts will help to evaluate and control the different
departments.

Objectives Of Departmental Accounting

The main objectives of departmental accounting are:

1. to check out interdepartmental performance

2. To evaluate the performance of the department with previous period result.

3. To help the owner for formulating right policy for future.

4. To assist the management for making decision to drop or add a department

5. To provide detail information of the entire organization

6. To assist management for cost control

Departmental Accoun ng
Department:

Department refers to activity centre (profit or cost centre) usually located in the
same roof but carrying distinct type of activites.
Departmental Accounting:
Department accounting or departmental accounting is a system of financial
accounting which is used in the organization whose all works are done
through
their different departments or departmental stores. Departmental account
s are prepared separately for each department and trial balance will also be
prepared. Departmental !" account is prepared to ascertain the profit or loss of
each department separately and at the end of the year it is transferred to General
profit and loss account of the whole organisation.
Objectives of departmental accounting:
The main objectives of departmental accounting are)
a) to have comparison of the results of a particular department with previous
year and also with the other departments of the same concern
b) To help the proprietor in formulating policy to expand the business on proper
lines so as to optimize the profits of the concern
c) To allow departmental managers* commission on the basis of the profits of
their departments and
d) To generate information which may be helpful for planning+ control+ and
evalutiaon of performance of each department and for taking various managerial
decisions,
Advantages of Department Accounts:
The main advantages of Departmental accounting are as follows
a) It provides an idea about the expenses of each department.
b) It helps to evaluate the performance of each department.
c) It helps to reward the Departmental managers and staff on the basis of
performance.
d) It facilitates control over the working of each department.
e) It helps to compare the result of one department with those of other
departments.
f) It helps the management to formulate the right business policies for the various
departments.
g) It will help in the preparation of departmental budgets.
h) It helps to calculate stock turnover ratio of each department.

(DEPARTMENTAL ACCOUNTING)
1. Following are the indirect expenses and income, determine the basis of
apportionment among the
Department.
2. Mention the bases of DIRECT EXPENDITURE/ BASIS OF
apportionment of joint INDIRECT EXPTENDITURE/ APPORTIONEMENT
expenses to department INCOME
SL.NO
1. Freight charges Ratio of Purchases
2. Carriage inwards Ratio of Purchases
3. Import duty, octroi Ratio of Purchases
4. Discount received Ratio of Purchases
5. Commission Ratio of Sales
6. Discount allowed Ratio of Sales
7. Sales tax and after sales Ratio of Sales
services
8. Carriage outwards Ratio of Sales
9. Travelling Ratio of Sales
10. Advertisement Ratio of Sales
11. Bad debts Ratio of Sales
12. Water charges Ratio of Meter reading
13. Depreciation of machinery Ratio of Power consumed
by each machine
14. Power charges Ratio of Floor space
15. Rent and rates Ratio of Floor space
16. Repairs and insurance of Ratio of Floor space
buildings
17. Air-conditioning expenses Ratio of Floor space
18. Electricity bills (lightings) Ratio of Number of points
19. Repairs of machinery Value of machinery/floor
space occupied by
machinery
20. Depreciation Ratio of Value of assets
21. Insurance premium Ratio of Subject matter
22. Workmen’s compensation Ratio of Wages to workers
insurance
23. Recreation expenses Ratio of Number of workers
24. Labour welfare expenses Ratio of Number of workers
25 Canteen expenses Ratio of Number of workers

Cost Allocation and Apportionment:

Cost allocation is the distribution of one cost across multiple entities, business units, or cost centers. An example is when health insurance premiums are paid by the main
corporate office but allocated to different branches or departments.

When cost allocations are carried out, a basis for the allocation must be established, such as the headcount in each branch or department.

What Is a Cost Allocation Methodology?

A cost allocation methodology identifies what services are being provided and what these services cost. It also establishes a basis for allocating these costs to business
units or cost centers based on their appropriate share of such cost.

The basis for allocating costs may include headcount, revenue, units produced, direct labor hours or dollars, machine hours, activity hours, and square footage.

Companies will often implement a cost allocation methodology as a means to control costs. Under an effective cost allocation methodology, business units become
directly accountable for the services they consume. As a result, both the service provider and the respective consumers of that service become aware of service
requirements and usage, and how such usage influences the costs incurred.

As business units begin seeing the cost of the services they consume, they can make more informed choices—such as trade-off decisions between service levels and
costs, and benchmarking internal costs against outsourced providers.

What Is the Process for Performing Cost Allocations?

Using a basis for allocation, costs are spread to each business unit or cost center that incurred the cost based on their proportional share of the cost. For example, if
headcount forms the basis of allocation for insurance costs, and there are 1000 total employees, then a department with 100 employees would be allocated 10% of the
insurance costs.

While there are numerous ways cost allocations can be calculated, it is important to ensure the reasoning behind them is documented. This is often done by establishing
allocation formulas or tables.

Once the calculation is established and cost distributions are calculated, journal entries are created to transfer costs from the providing or paying entity to the appropriate
consuming entities. During each financial period, as periodic expenses are incurred, this calculation is repeated and allocating entries are made.

Cost Apportionment :
A cost apportionment base is the basis used by a business to apportion its overhead costs. The apportionment base is usually a quantity such as the floor area of a
department, book value of machinery, number of employees, machine hours used, or kilowatt hours of electricity used.
An apportionment is the separation of revenues, expenses, or profits, which are then assigned to different accounts, departments, or subsidiaries. The concept is used in particular for the assignment of profits to
different geographic regions of a business, which impacts the taxable profits reported to different governments

The base used should be appropriate for the overhead cost to ensure that the cost is fairly apportioned between cost centers. For example, personnel costs might be
included in general overhead and then be apportioned to other departments based on the number of employees in that department, or depreciation might be apportioned
based on the book value of machines used within a department.

The overhead cost is then apportioned using the following formula for each base.

Apportionment = Overhead cost x Department base quantity / Total base quantity