Allocation of Indirect Expenses and Three Column Report in Managerial Accounting

This presentation covers the allocation of indirect expenses to departments and computation of net income in Managerial Accounting. It also explains the preparation of a three column report and reconciliation between actual and forecasted income statements. The presentation includes a recommendation based on the income statement. References from various authors are also provided.

MANAGERIAL
ACCOUNTING

 Vortex has a retail store with two departments
A & B with relevant cost and expense
information being given
 Objective is to allocate the indirect expenses to
the two departments and thereby compute the
net income
 Based on the income computation, it needs to
be highlighted if Department B ought to be
discontinued
Problem 9-4A -
Introduction

 Allocation of Salaries
Indirect expenses
allocation

 Allocation of Depreciation
Indirect expenses allocation
(contd..)

 Allocation of Insurance
Indirect Expense Allocation
(Contd..)

 Allocation of office expenses
Indirect Expense Allocation
(Contd..)

Departmental Income
Statement

 Department B should not be eliminated
despite making a net loss
◦ Indirect expenses are unavoidable
◦ Elimination of Department B would lower the
overall profits of firm by $ 30,000
◦ Department B is able to generate profits when
indirect expenses are not considered
◦ Company needs to ensure discontinuation of
atleast $ 30,000 indirect or overhead expenses to
discontinue department B
Recommendation

 Preparation of three column report
◦ Column 1- Total expenses including COGS
◦ Column 2 – Eliminated expenses by closing
department 200
◦ Column 3- Continued Expenses
 Forecasted Annual Income Statement
 Reconciliation between current income
statement and forecasted annual income
Problem 10-6A -
Introduction

Three Column Report

Forecasted Income
Statement

 The salary expenses for the forecasted
income statement is shown below.
Computation of Salary Expenses

Reconciliation between Actual &
Forecasted income statement

 Bhimani, A., Horngren, C.T., Datar, S.M. & Foster, G.
(2017), Management and Cost Accounting 4th ed. Harlow:
Prentice Hall/Financial Times
 Brealey, R. A., Myers, S. C. & Allen, F. (2014) Principles of
corporate finance, 6th ed. New York: McGraw-Hill
Publications
 Damodaran, A. (2015). Applied corporate finance: A
user’s manual 3rd ed. New York: Wiley, John & Sons.
 Drury, C. (2016) Cost and Management Accounting: An
Introduction. 6th ed. New York: Cengage Learning
 Ehrhardt, M. C. & Brigham, E. F. (2016) Corporate
Finance: A Focused Approach. 6th ed. London: South-
Western College Publisher
References