Theory question 102
Branch Accounts2. (a) Explain the two methods of accounting for goods sent to branch. (b) State three bases of apportioning expenses to departments. (c) State four reasons why organizations separate their operations into different departments.
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(a) Cost price method: goods are sent and recorded at cost, and the branch account (or branch stock account) shows profit directly. Selling price (invoice price) method: goods are charged at selling price; the loading (mark-up) is held in a branch stock adjustment account and removed at the end to find gross profit, which also helps control stock losses. (Alternatively: debtors method vs stock and debtors method.)
(b) Any three: floor area; sales or turnover; purchases; number of employees; value of assets; meter readings; direct allocation.
(c) Any four: to measure the profit of each department; to compare departments and identify weak ones; to control costs; to reward or assess departmental managers; to help in pricing and policy decisions; specialisation and efficiency.
Know both branch methods and why a firm splits into departments.