Accounting - Case study 1 - departmental profit and loss statement
Case study 1 - departmental profit and loss statement
Welcome to Matts World. This business sells and repairs bicycles.
* Matts World sells and repairs bicycles. Workshop equipment is only
involved in repairing bicycles, delivery costs are only for the sale of
* Matts World employs three sales staff, who spend two-thirds of their
time selling bicycles and one-third repairing bicycles. Two other people
work full time at repairing bicycles. There are two staff members employed
in the office
* The business has four cost centres: sales, workshop, office and finance
* Each person employed by Matts World is paid $100 per day and works a
five day week. The prepaid and accrued expenses must be dealt with at the
beginning of the month
* The calendar for November is shown below. Dates shown in bold are the
days on which staff are paid. Staff do not work on Monday and Tuesday as
Matts World operates in a tourist area and these are quiet days. They do
work on weekends
* workshop equipment is depreciated at 12% per annum on cost
* interest is paid annually in December. It is $600 for the year on the
Bank overdraft, $1600 for the year for the loan and $4000 for the mortgage
* rent is $2400 per month expense and is allocated in equal proportions
to sales, workshop and office
* advertising is allocated 60% to sales of bicycles and 40% to repairs
* cash sales are 40% of total sales. Cash sales are $40 000 for the
* fees are $20 000 for bicycle repairs. All fees are for cash
* there is a mark up of 100% on all bicycles sold
* stock loss is $1500
* bad debts are $600
* at the end of November prepaid rent is $200
* advertising $6000
* delivery costs $1800
* cleaning $500
A departmental Profit and Loss statement 
* In this particular problem rent has been allocated in equal amounts to
sales, repairs and office. This suggests an arbitrary allocation. Do you
agree that all expenses should be allocated to departments?
* What advantages will Matt's World gain by classifying the Profit and
Loss statement into departments?
* What advantages will Matt's World gain by classifying the balance sheet
* What are the benefits of reporting more frequently?
* The repairs department is not performing nearly as well as the sales
department. What reasons may exist for retaining this department despite
what appears to be a relatively poor performance?
* Suggest two reasons why it may be inappropriate to allocate cleaning to
* Define the term 'contribution margin'
* List four items you would consider 'general expenses'
* It is discovered that $200 of cleaning has been used by Matt for
private use. How would you make this correction in the general journal
View the text document for solution to case study 1 - departmental profit
and loss statements.
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