Chapter 24, Problem 3BP

To determine

Prepare departmental income statements that show the company’s predicted results of operations for calendar year 2016 for the three operating (selling) departments and their combined totals.

Explanation of Solution

Department: A division of the company or an organization which performs the functions of the company is referred to as department.

Prepare departmental income statements.

Company B
Forecasted Departmental Income Statements
For Year Ended December 31, 2016
Particulars	Movies	Video games	Compact Discs	Combined
Sales (Refer Table (2))	$648,000	$216,000	$300,000	$1,164,000
Less: Cost of goods sold (Refer Table (3))	$453,600	$166,320	$195,000	$814,920
Gross profit	$194,400	$49,680	$105,000	$349,080
Less: Direct expenses
Sales salaries	$37,000	$15,000	$18,000	$70,000
Advertising	$12,500	$6,000	$10,000	$28,500
Store supplies used (Refer Table (4))	$4,320	$1,080	$2,000	$7,400
Depreciation of equipment	$4,500	$3,000	$1,200	$8,700
Total direct expenses (A)	$58,320	$25,080	$31,200	$114,600
Allocated expenses
Rent expense (Refer Table (5))	$30,750	$6,000	$13,250	$50,000
Utilities expense(Refer Table (5))	$5,535	$1,080	$2,385	$9,000
Share of office department  expenses (Refer Table (6))	$47,345	$15,725	$21,930	$85,000
Total allocated expenses (B)	$83,630	$22,805	$37,565	$144,000
Total expenses $\left(\text{A}\right)+\left(\text{B}\right)$	$141,950	$47,885	$68,765	$258,600
Net income	$52,450	$1,795	$36,235	$90,480

Table (1)

Working note:

(1) Determine the sales for each department.

Particulars	Movies	Video games	Compact Discs
Sales for the year 2015 (A)	$600,000	$200,000
Growth rate $\left[100+\left(\text{100}\times \text{8\%}\right)\right]$ (B)	108%	108%
Sales for the year 2016 $\left(\text{A}\right)\times \left(\text{B}\right)$	$648,000	$216,000	$300,000

Table (2)

(2) Determine the cost of goods sold for each department.

Particulars	Movies	Video games	Compact Discs
Cost of goods sold for the year 2015 (A)	$420,000	$154,000
Sales for the year 2015 (B)	$600,000	$200,000
Percentage of Cost of goods sold for the year 2015$\left[\left(\text{A}\right)÷\left(\text{B}\right)\right]\times 100$	70%	77%
Sales for the year 2016 (C)	$648,000	$216,000	$300,000
Percentage of Cost of goods sold for the year 2016 (D)	70%	77%	65%
Cost of goods sold for the year 2016 $\left(\text{C}\right)\times \left(\text{D}\right)$	$453,600	$166,320	$195,000

Table (3)

Note:

• Refer Table (2) for the sales revenue for the year 2016.
• The gross margin is 35% on sales. So, the percentage of goods sold for year 2016 is $\left(100-35\%\right)$65%.

(3) Determine the store supplies expense for each department.

Particulars	Movies	Video games	Compact Discs
Store supplies used in 2015	$4,000	$1,000
Growth rate $\left[100+\left(\text{100}\times \text{8\%}\right)\right]$ (B)	108%	108%
Store supplies used in 2016	$4,320	$1,080	$2,000

Table (4)

(4) Allocate the rent and utilities for each department.

Particulars	Movies	Video games	Compact Discs	Total
Rent expense for 2015	$41,000	$9,000		$50,000
One-fifth from Movies to Compact Discs	($10,250)		$10,250
One-fourth from Video games to Compact Discs		$(3,000)	$3,000
Allocation of rent expense of $50,000 (A)	$30,750	$6,000	$13,250	$50,000
Percentage of total rent expense (B) $\left[\left(\text{A}\right)÷\text{\$50,000}\right]\times 100$	61.5%	12.0%	26.5%
Allocation of utilities expense $\left[\left(\text{B}\right)\times \text{\$9,000}\right]÷100$	$5,535	$1,080	$2,385	$9,000

Table (5)

(5) Allocate the office department expense.

Particulars	Movies	Video games	Compact Discs	Total
Sales for the year 2016 (A)	$648,000	$216,000	$300,000	$1,164,000
Percent of total sales  (B)$\left[\left(\text{A}\right)÷\text{\$1,164,000}\right]\times 100$	55.7%	18.5%	25.8%
Office department expense for 2016 (C) $\left[\left(\text{B}\right)\times \text{\$85,000}\right]÷100$	$47,345	$15,725	$21,930	$85,000

Table (6)

Note: The total office department for the year 2015 is $75,000 and the management expects in the increase in the expense by $10,000. Thus, the total office department expense is $\left(\$75,000+\$10,000\right)$ $85,000.