Chapter 22, Problem 4PSA

1

To determine

Department contribution statement

Explanation of Solution

V Company
Department Contribution statement
Particulars	Department A	Department B
Sales	800,000	450,000
Cost of goods sold	497,000	291,000
Gross profit	303,000	159,000
Direct expenses
Salaries expense	125,000	88,000
Depreciation expenses	21,000	12,000
Insurance	20,000	10,000
Utilities	24,000	14,000
Maintenance	7,000	5,000
Total direct expenses	197,000	129,000
Departmental contribution to overhead	106,000	30,000
Indirect expenses
Salaries expenses	23,040	12,960
Office expenses	30,000	20,000
Insurance expense	4,200	1,800
Depreciation expenses	4,200	1,800
Depreciation	10,500	4,500
Total indirect expenses	67,740	39,260
Net income(loss)	38,260	(9,260)

Hence, department A has net income of $38,260 and department B has net loss of $9,260.

Working notes:

Given,
Department A sale is $800,000.
Department B sale is $450,000.

Calculate the total sale of department A and B,

$\begin{array}{c}\text{Total}\text{sale}=\text{Department}\text{A}+\text{DepartmentB}\\ =\text{\$800,000}+\text{\$450,000}\\ =\text{\$1,250,000}\end{array}$

Compute the percentage of sales of Department A,

$\begin{array}{c}\text{Percentage}\text{of}\text{sale}=\frac{\text{Deparment}\text{A}\text{sale}}{\text{Total}\text{sale}}\times 100\\ =\frac{\$800,000}{1,250,000}\times 100\\ =64\%\end{array}$

Compute the percentage of sales of Department B,

$\begin{array}{c}\text{Percentage}\text{of}\text{sale}=\frac{\text{Deparment}\text{B}\text{sale}}{\text{Total}\text{sale}}\times 100\\ =\frac{\$450,000}{1,250,000}\times 100\\ =36\%\end{array}$

Allocation of salary on the basis of sale

Given,
Salary is 36,000.
Percentage of A department sale is 64%.
Percentage of B department sale is 36%.

Computation of salary of A department,

$\begin{array}{c}\text{Deparment}\text{A}\text{salary}=\text{Percentage}\text{of}\text{sale}\times \text{Total}\text{salaries}\\ =\frac{64}{100}\times \$36,000\\ =\$23,040\end{array}$

Computation of salary of B department,

$\begin{array}{c}\text{Deparment}\text{B}\text{salary}=\text{Percentage}\text{of}\text{sale}\times \text{Total}\text{salaries}\\ =\frac{36}{100}\times \$36,000\\ =\$12,960\end{array}$

Allocation of insurance on the basis of square feet,

Given,
Department A square feet is $28,000.
Department B square feet are $12,000.

Calculate the total square feet of department A and B,

$\begin{array}{c}\text{Total}\text{square}\text{feet}=\text{Department}\text{A}+\text{DepartmentB}\\ =\text{\$28,000}+\text{\$12,000}\\ =\text{\$40,000}\end{array}$

Compute the percentage of square feet of Department A,

$\begin{array}{c}\text{Percentage}\text{of}\text{square}\text{feet}=\frac{\text{Deparment}\text{A}\text{square}\text{feet}}{\text{Total}\text{square}\text{feet}}\times 100\\ =\frac{\$28,000}{\$40,000}\times 100\\ =70\%\end{array}$

Compute the percentage of square feet of Department B,

$\begin{array}{c}\text{Percentage}\text{of}\text{square}\text{feet}=\frac{\text{Deparment}\text{B}\text{square}\text{feet}}{\text{Total}\text{square}\text{feet}}\times 100\\ =\frac{\$12,000}{\$40,000}\times 100\\ =30\%\end{array}$

Given,
Insurance is $6,000.
Department A square feet is 70%.
Department B square feet are 30%.

Calculate the amount of the insurance on the basis of square feet,

$\begin{array}{c}\text{Department}\text{A}=\text{Insurance}\times \text{\%}\text{of}\text{square}\text{feet}\\ =\frac{70}{100}\times \$6,000\\ =\$4,200\end{array}$

$$ $\begin{array}{c}\text{Department}\text{B}=\text{Insurance}\times \text{\%}\text{of}\text{square}\text{feet}\\ =\frac{30}{100}\times \$6,000\\ =\$1,800\end{array}$

Hence, amount of the insurance on the basis of square feet of department A and B are $4,200 and $1,800.

Allocation of the depreciation on the basis of square feet,

Given,
Department A square feet is $28,000.
Department B square feet are $12,000.

Calculate the total square feet of department A and B,

$\begin{array}{c}\text{Total}\text{square}\text{feet}=\text{Department}\text{A}+\text{DepartmentB}\\ =\text{\$28,000}+\text{\$12,000}\\ =\text{\$40,000}\end{array}$

Compute the percentage of square feet of Department A,

$\begin{array}{c}\text{Percentage}\text{of}\text{square}\text{feet}=\frac{\text{Deparment}\text{A}\text{square}\text{feet}}{\text{Total}\text{square}\text{feet}}\times 100\\ =\frac{\$28,000}{\$40,000}\times 100\\ =70\%\end{array}$

Compute the percentage of square feet of Department B,

$\begin{array}{c}\text{Percentage}\text{of}\text{square}\text{feet}=\frac{\text{Deparment}\text{B}\text{square}\text{feet}}{\text{Total}\text{square}\text{feet}}\times 100\\ =\frac{\$12,000}{\$40,000}\times 100\\ =30\%\end{array}$

Given,
Depreciation amount is $15,000.
Department A square feet is 70%.
Department B square feet are 30%.

Formula to calculate the amount of the insurance,

$\begin{array}{c}\text{Department}\text{A}=\text{Depreciation}\times \%\text{of}\text{square}\text{feet}\\ =\frac{70}{100}\times \$15,000\\ =\$10,500\end{array}$

$\begin{array}{c}\text{Department}\text{B}=\text{Depreciation}\times \%\text{of}\text{square}\text{feet}\\ =\frac{30}{100}\times \$15,000\\ =\$4,500\end{array}$

Hence, allocation of the depreciation expense on the basis of the square feet of department A and B are $10,500 and $4,500.
Allocation of the office expenses on the basis of the number of the employees allocated to the department.
Given,
Number of employees in department A is 75.
Number of employees in department B is 50.

Calculate the total number of employees in department A and B,

$\begin{array}{c}\text{Total}\text{number}\text{of}\text{employees}=\text{Department}\text{A}+\text{DepartmentB}\\ =75\text{Employees}+50\text{Employes}\\ =125\text{Employees}\end{array}$

Compute the percentage of employees in Department A,

$\begin{array}{c}\text{Percentage}\text{of}\text{employees}=\frac{\text{Deparment}\text{A}\text{employees}}{\text{Total}\text{employees}}\times 100\\ =\frac{75}{125}\times 100\\ =60\%\end{array}$

Compute the percentage of employees in Department B,

$\begin{array}{c}\text{Percentage}\text{of}\text{employees}=\frac{\text{Deparment}\text{B}\text{employees}}{\text{Total}\text{employees}}\times 100\\ =\frac{50}{125}\times 100\\ =40\%\end{array}$

Given,
Office expense amount is $50,000.
Percentage of the employees in the department A is 60%
Percentage of the employees in the department B is 40%

Calculate the amount of office expenses,

$\begin{array}{c}\text{Department}\text{A}=\text{Office}\text{expenses}\times \%\text{of}\text{employees}\\ =\frac{60}{100}\times \$50,000\\ =\$30,000\end{array}$

$$ $\begin{array}{c}\text{Department}\text{A}=\text{Office}\text{expenses}\times \%\text{of}\text{employees}\\ =\frac{40}{100}\times \$50,000\\ =\$20,000\end{array}$

Hence, Office expense of the department A and b are $30,000 and $20,000.

2.

To determine

Elimination of department B

Explanation of Solution

Here, it can be seen that total Indirect expenses of the department A is $67,740 and department B is $39,260. Net income of the department A and B are $38,260 and $9,260 respectively. Contribution of overhead at department A and B are positive with $106,000 and $30,000 respectively.
From the above data it can be said that department B comes to loss due to the indirect cost. So, it will be better to not eliminate the department B