Question

Explain the importance of departmental income statement in an enterprise in which several separate departments function. Provide an example of a departmental income statement in which at least three shared indirect costs are divided according to three different appropriate allocation bases.

Answer 1

Answer with Explanation:

Following are the benefits of using departmental Income Statements:

• Gives an understanding of where the company lacks efficiency
• Helps in setting budgets and efficiency cuts so that the management of the department works hard to lower operational lead time and other efficiencies found in the operational activities. By setting the budgeted income statement for the department, the appraiser of the company performance is possible by using variance analysis method.
• The Departmental Income Statement also helps in appraising performance of each department which helps identifying which department requires upper level management attention.
• It is very useful when undergo financial analysis of departmental income statement which helps in identification of problematic areas, which are lowering profits and thus corrective actions can be taken to overcome these issues.
• It helps in allocating of jointly shared costs of non production overheads like Accounts Department Costs, Audit Department Costs, Electricity bills, etc. This helps in better appraisal of departments and identification of appropriate basis. In the above case the appropriate basis would be Income balances for accounts department, Income Balances For audit department cost and electricity units consumption of each department.

The above benefits makes the department income statements important for the managerial use.