How do you prepare departmental accounts that apportion shared costs so the profit of each department can be judged?
Preparation of departmental income statements, including the apportionment of shared expenses between departments on a suitable basis and the calculation of each department's gross and net profit to support decisions about a department.
A focused answer to the SQA Higher Accounting departmental accounts content, covering why a business splits results by department, choosing a fair basis to apportion shared expenses, calculating each department's profit, and using the result to judge a department.
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What this dot point is asking
The SQA wants you to prepare an income statement that splits a business's results between its departments, apportioning shared costs on a fair basis so the profit of each department can be seen. You must then be able to comment on the result, especially the danger of closing a department just because it shows a loss after shared costs.
Why split by department
A single overall profit hides how each part of the business performs. By preparing departmental accounts, management can see which departments are strong, which are weak, and where to focus. A department store, for example, can compare clothing, electrical and food departments. The information supports decisions about pricing, promotion, floor space and, occasionally, whether to keep a department.
Direct costs and apportionment
Some expenses can be charged straight to the department that incurs them, such as the wages of staff who work only in that department. Shared expenses must be apportioned on a basis that fairly reflects how each department causes or benefits from the cost.
Choosing the basis
The basis should match what drives the cost. Rent depends on space, so floor area is fair. Advertising that promotes the whole store may be split on sales, since departments selling more benefit more. Choosing the wrong basis distorts each department's result, so the SQA expects you to justify your choice, not just apply one.
Judging a department
The most examined point is interpretation. A department may show a net loss only after a share of unavoidable head office or rent costs is charged to it. If the department still covers its own direct costs and contributes towards the shared overhead, closing it would lose that contribution and leave the unavoidable costs to be carried by the remaining departments, which could turn their profits into losses. The decision should rest on the department's contribution and on which costs are genuinely avoidable, not on the apportioned net profit alone.
Try this
Q1. Rent of £30,000 is split on floor area: Department P 800 m squared, Department Q 400 m squared. Calculate each share. [2 marks]
- Cue. Total 1,200 m squared. P = (800/1,200) x £30,000 = £20,000; Q = £10,000.
Q2. State a suitable basis for apportioning canteen costs and explain why. [2 marks]
- Cue. Number of employees, because canteen use depends on how many staff each department has.
Q3. Give one reason a loss-making department might be kept open. [1 mark]
- Cue. It may still contribute towards unavoidable shared overheads that would otherwise fall on the other departments.
Exam-style practice questions
Practice questions written in the style of SQA exam questions on this dot point, with worked answer explainers. The year tag is the paper they imitate, not the source.
SQA Higher style5 marksTotal rent of £24,000 is to be apportioned between Department A (floor area 600 m squared) and Department B (floor area 200 m squared). Total advertising of £6,000 is to be apportioned on sales: Department A £150,000, Department B £50,000. Calculate the rent and advertising charged to each department.Show worked answer →
Apportion rent on floor area. Total area = 600 + 200 = 800 m squared. Department A rent = (600 / 800) x £24,000 = £18,000; Department B rent = (200 / 800) x £24,000 = £6,000 (2 marks).
Apportion advertising on sales. Total sales = £150,000 + £50,000 = £200,000. Department A advertising = (150,000 / 200,000) x £6,000 = £4,500; Department B advertising = (50,000 / 200,000) x £6,000 = £1,500 (2 marks).
So Department A is charged £18,000 rent and £4,500 advertising; Department B is charged £6,000 rent and £1,500 advertising (1 mark for stating both correctly). Markers reward each apportionment on the correct basis.
SQA Higher style4 marksA department makes a net loss after a share of head office costs is charged to it. Explain two reasons why the business should not automatically close the department.Show worked answer →
Reason one: the apportioned head office costs are largely unavoidable, so closing the department would not remove them; they would simply be reborne by the other departments, possibly turning their profits into losses (2 marks for a developed point).
Reason two: the department may still make a positive contribution, covering its own direct costs and part of the shared overhead; closing it would lose that contribution and could reduce overall profit (2 marks). Markers reward two developed reasons that distinguish avoidable from unavoidable costs and recognise contribution.
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Sources & how we know this
- SQA Higher Accounting Course Specification — SQA (2023)