Solution 15.1

Advantages of departmental accounting

• The overall profit figure disguises individual department losses.

• Promotes responsibility accounting

• Managers have increased cost awareness

• Department contribution is highlighted

• Motivation of staff

The gross profit method breaks down sales, purchases and stock items into the various departments with the aim of controlling the gross profit of each department. Each department reports its gross profit which, when added together, gives the total gross profit for the organisation. From this, all the other expenses of the business are deducted to give a total net operating profit.

The department profit method deducts all the expenses attributable to, and controlled by, a department from departmental sales. The aim is to ascertain and control the revenues, costs and thus profits of each department. The expenses that are not directly attributable to a specific department are charged against the total departmental profit to give a total operating profit for the organisation. 

The disadvantage of this approach is that it requires an elaborate accounting system to provide the information and many smaller businesses would not have the access to such accounting systems.

In the net profit method all the expenses of the business are charged to each revenue producing department whether they are directly related and controlled by that department or not.