What do you mean by departmental accounts? Explain the basis of allocation of expenses over various departments.

Meaning of Departmental Accounts

Departmental Accounts are the accounts prepared by a business that is divided into different departments (such as clothing, electronics, cosmetics, groceries, etc.) to find out the profit or loss of each department separately.
They help the management compare the performance of departments, identify profitable/unprofitable sections, and make better decisions regarding pricing, expansion, or closure. allocation of expense over different department

Basis of Allocation of Expenses Over Various Departments

In departmental accounting, some expenses can be directly identified with a department (direct expenses) and are charged directly.
Other expenses (common/indirect expenses) must be allocated on a fair and logical basis. allocation of expense over different department

Below are the common bases:

1. Rent, Rates, Insurance of Building

🔹 Basis: Floor area occupied by each department (sq. ft. or sq. m.)

2. Electricity Charges (Lighting & Power)

🔹 Lighting: Floor area or number of light points
🔹 Power: Machine hours or horsepower (HP)

3. Salaries and Wages

🔹 Direct wages → charged directly
🔹 Indirect wages → allocated on labour hours or number of employees allocation of expense over different department

4. Advertisement Expenses

🔹 Basis: Sales of each department
(More sales = more benefit from advertisement) allocation of expense over different department

5. Depreciation of Machinery

🔹 Basis: Value of machinery used in each department or machine hours

6. Carriage Inward / Freight Inward

🔹 Basis: Value or quantity of goods purchased for each department allocation of expense over different department

7. Discount Allowed / Discount Received

🔹 Basis: Sales (allowed) or purchases (received) allocation of expense over different department

8. Manager’s Salary / General Office Expenses

🔹 Basis: Sales or gross profit of each department
(Because these benefit all departments)

9. Repairs and Maintenance

🔹 Basis: Value of assets or machinery used by each department

10. Bad Debts / Provision for Doubtful Debts

🔹 Basis: Department-wise credit sales

Summary

Departmental accounts help in finding out the profitability and efficiency of each department separately.
Direct expenses are charged directly, while common expenses are divided among departments on logical bases such as sales, purchases, floor area, number of employees, machine hours, etc. This ensures a fair and accurate distribution of costs. allocation of expense over different department

If you want to check the Syllabus of Financial Accounting, then you visit the official website Gndu. allocation of expense over different department

👉 Note:- Important questions of Financial Accounting as following

1. What is capital expenditure, revenue expenditure and deferred revenue expenditure? Give characteristics of each. When are revenue expenses treated as capital expenses. ( December- 2023 )
2. What are Consignment Accounts? Explain accounting treatment of consignment transactions in the books of consignor and consignee. ( December 2024 )
3. What is a Voyage Account? Explain the procedure of preparing voyage accounts. ( December- 2023 )
4. What are departmental accounts? What are its objectives? Discuss the methods of departmental accounts. ( December 2023 )
5. Difference between Joint Venture and Partnership.