DEPARTMENTAL A/C

In hotel there are many department,some of them are revenue producing

department & others are non-revenue producing department.These non-

revenue producing department are equally important as without them the other

departments can’t produce revenue.In departmental a/cing only those

departments which produce revenue are taken into a/c.The department means

the revenue producing department ‘under the head departmental a/cing’.The

management is always been to know the gross profit,departmental profit & net

profit of each department.It can be compared with budgeted profit & with

previous years & other departments as well on knowing these details the

management can decide whether dept functions is efficient or not & if not then

what corrective major can be taken.

One of the major benefit of departmental a/cing i.e the costs

are divided into direct & indirect cost.Direct cost are those cost incurved

exclusively by the dept where as indirect cost are general cost incurved by the

establishment or a whole & shared between departments on some arbitrary

basis.Direct & indirect cost are often referred to as controllable & uncontrollable

cost respectively.This is because direct cost should be fully controllable by the

departmental manager where as indirect cost are not controllable by him.

In addition in a business consisting of several department it is

clearly necessary to find the separate result pf each department otherwise the

fact that some department are being operated at a loss will not be revealed.

BOOK KEEPING RECORDS:-

In order to be able to asserting of the profit of each dept.

Suitably analyse records i.e subsidiary books & ledger a/c must be kept.The

exact analysis of income & expenditure depends on the particular circumstances

of each business & on the degree of departmentalization desired.

Methods to know departmental profit:-

There are 3 main methods by which departmental final

a/cing may be prepared.These are as follows:-

a.Gross profit method

b.Departmental profit method

c.Net profit method

a.GROSS PROFIT METHOD

This is the method most commonly used in hospitality establishment. In enables

& analysis of purchase,sales & stocks only i.e items affecting gross profit of each

department.Its aim is to control the gross profit of each dept.Expenses such as

wages, salaries,advertisement,electricity are not analysed and are debited in the

profit & loss a/c against the total of gross profit+any other income,such as room

sales,discount receive,investment income.

The main advantage of those method is simplicity.its

disadvantage are:-

1.no attempt is made to control departmental expenses such as wedges,salaries

etc.

2.A dept may earn a high percentage of gross profit.Yet of its over heads are

high contribute little to the net profit of the business.

Trading & profit & loss a/c Particular Dept(A) Dept(B) Dept(C) Total Particular Dept(A) Dept(B) Dept(C)

Opening stock purchase

Sales Gross profit b/d Discount received Commission received Rent received Net loss

Less closing stock

Cost of good sold profit

Wedges & salaries

Rent,rates & taxes

Lighting heating

Prepare & maintenance

Printing stationary

Depreciation

Miscellaneous expenses

Net profit

b.DEPARTMENTAL PROFIT METHOD

The second method is excellent as it requires elaborate set

of records & high degree of departmentalization & therefore can only be applied

in large hospitality operations.The aim of this method is to accepting &control

the departmental profit of each section of a business.

Departmental profit may be defined as the total revenue of

a department less the cost of good sold,departmental wedges,salaries & any

other expenses attributable to that department.As other expenses those

incurved on behalf of the business as a whole such as rent,taxes,advertising etc.

are debited against a total of departmental profit in the general profit & loss

a/c.

It will be appreciated that this method is both good a/c &

good management as in effect each departmental manager is made responsible

for all income & expenditure he is capable of controlling. In order to produce an

adequate amount of departmental profit he must control not only the cost of

good he sales but also other direct expenses incurred by his departments.

c.NET PROFIT METHOD

Under this method all expenses are debited to

revenue producing department in order to arrive at or figure of net profit for

each of them.Expenses that are attributable to any organisation from a certain

department are allocated to that dept expenses which are incurved or behalf of

the business as a whole are apportion or some fair & reasonable basis as before

the departments concerns. Thus rent & rates could be apportion or the basis of

the floor space occupied by each dept.General manager salary could apportion

or the basis of the term over(sales)of each dept etc.

Arguments in favour of this method are:-

a.Expenditure which has to be apportion benefits on the department concern

each dept should therefore be charged with a fair proportion of the total.

b.The dept may produce a large amount of gross profit,yet if its fixed expenses

are high,so little or no net profit.

c.The main purpose of business is to make profit & attempt should be made to

find how much net profit has been made by each dept.

Arguments against this method are:-

a.Whatever method of apportionment is chosen its always arbitrary method.

b. Apportion (indirect)expenses are incurved to benefits the business as a whole

is a particular dept where close down many of expenses would remain

unchanged.

c.The apportionment of expenses may give a misleading picture of the result

achieved by dept.

Trading & profit * loss a/c

Departments Sales Cost of sales Departmental exp

Deparrtmental P & L

A ** ** ** **

B ** ** ** ** C ** ** ** **

D ** ** ** **

(+)Other sources of income

Interest received ***

Discount received ***

Commission received *** ***/***

(-)Unapportioned

Salaries ***

Rent ***

Advertisement ***

Net profit ***/***

Net profit method formulas

Trading and profit & loss a/c for the year ended.

Basis of cost allocation

There is no set produce laid down for cost allocation. The cost allocation may

differ from place to place from one type of organization to another from

management to management. The direct cost is automatically debited to

individual departments. If the direct cost which needs to be allocated to

different dept and indirect cost should not be arbitrarily divided among depts.

But it should have a meaningful relationship between the profit centre and the

amount of indirect cost i.e to be allocated to it. To allocate a particular indirect

cost to various dept. there may be more than one base to choose,one hotel may

find one particular method more suitable another hotel dept head may agree to

other method of allocation.

The following are the different basis of allocating the cost.

Particular Dept(A) Dept(B) Dept(C) Total Particular Dept(A) Dept(B) Dept(C) Total

Costs of good sold

By sales By gross profit b/d

To gross profit

To salaries To wages

To advertisement

To rent To net profit

Cost Basis

1.Interest a.Total capital employeed in

the dept.

b.square ft of area occupied

c.ratio to sales

2.Insurance a.square ft of area occupied

b.amount of each dept issue

c.the total value of each

assets

3.Taxes a.ratio to sales

b.basis of tax

4.Rent a.ratio to sales

b. square ft of area occupied

5.Depriciation a. Square feet of area occupied (Building) b. Value of assets c. Number of hours machines

are used

6. Telephone a. Each department can be metered b. Number of extensions sanctioned

c. Ratio of sales

7.Employee’s Benefit a. Number of employees b. Refer to payroll records 8. Advertisement a. Ratio to sale

9.Light & power a.No of light/power

b.Cubic ft of area occupied

c.No of hours the dept

operates

d.Ratio of sales

ACCOUNTS

Q1.Prepare a dept income statement from the following information?

Sales:Resturant-6,00,000,Rooms-2,00,000,Bar-2,00,000

Cost of sales:Rest-1,50,000,Rooms-70,000,Bar-60,000

Wages and salaries-240000

Repair and maintainance-40000

Gas and electricity-20000

Rent,rates and taxes-4000

Depreciation-50000

Advertising-25000

Laundry and cleaning-5000

Office administrative exp-3000

Postage and telephone-6000

Gross profit method particular Rest Room Bar Total Particula

r

Rest Room Bar Total

Cost of sales

150000

70000 60000 280000 By sales 600000

200000

200000

1000000

To gross profit

450000

130000

140000

720000

600000

200000

200000

1000000

600000

200000

200000

1000000

Wages & salaries

240000 By gross profit b/d

72000

Repair & maintenance

40000

Rent ,rates,taxes

40000

Gas & electricity

20000

Depreciation

50000

Advertising

25000

Laundry & cleaning

5000

Office administrative exp

3000

Postage & telephone

6000 291000

Net profit

291000

720000

720000

Q.2.Prepare a departmental income statement

Sales:-Rest-600000,room-200000,bar-200000

Cost of sales:- Rest-150000,room-70000,bar-60000

Wages and salaries:-Rest-150000,room-80000,bar-10000

Repair and maintenance:-Rest-20000,room-15000,bar-5000

Gas and electricity-20000

Rent,rates,taxes-40000

Depreciation-50000

Potage & telephone-6000

Advertising-25000

Laundry & cleaning-5000

Office & administration-30000

*Unallocated expenses are to be apportion based on the following:

(a) Gas & electricity:-

Rest-50%

Room-30%

Bar-20%

(b)Rent,rate,taxes & depreciation:-

Rest-40%

Room-40%

Bar-20%

(c)All other expenses are apportion on the basis of sales.

Net profit method Particular Restaura

nt Room Bar Total Particul

ar Restaurant

Room Bar Total

Cost of sales 150000 70000 60000 280000 By sales 600000 200000

200000

1000000

Gross profit 450000 130000

140000

720000 Gross profit b/d

600000 200000

200000

1000000

600000 200000

200000

1000000

450000 130000

140000

720000

Wages & salaries

150000 80000 10000 240000

Repair & maintenance

20000 15000 5000 40000

Gas & Electricity

10000 6000 4000 20000

Rent,Rates & taxes

16000 16000 8000 40000

Depreciation

20000 20000 10000 50000

Postage & telephone

3600 1200 1200 6000

Advertising 15000 5000 5000 25000

Laundry 3000 1000 1000 5000

Office advertiseme

nt

18000 6000 6000 30000

Net profit 194400

20200

89800

264000

450000

130000

140000

720000

450000

130000

140000

72000000