critical thinking

The upper hali' of Exhibit 24.12 L shows a departmental contribution to overhead as part of an expanded income statement. Departmental contribution to overhead, because it focuses on the direct expenses that are under the profit Page 1050 center manager's control, is often a better way to assess that manager's performance. EXHIBIT 24.12 Departmental Contribution to Overhead A-1 HARDWARE Income Statement Showing Departmental Contribution to Overhead For Year Ended December 31, 2017 Hardware Department Housewares Department Appliances Department combined Sales $119,500 $ 71,700 $47,800 $239,000 Cost of goods sold _73.800 43.800 | 30,200 147,800 Gross Read this section if you do not understand the highlighted 27.900 17,600 91,200 Direct topic. 30,400 700 15,600 400 300 16,300 $ 29,400 7.000 100 200 7.300 $ 20,600 7,800 200 100 8.100 $ 9,500 600 31,700 $ 59,500 Salaries expense Depreciation expense-Equipment Supplies expense Total direct expenses Departmental contributions to overhead Indirect expenses Rent expense Utilities expense Advertising expense Insurance expense General office department expense Purchasing department expense Total indirect expenses Operating income 10,800 1,800 1,000 1,900 15,300 9,700 40,500 $ 19,000 Exhibit 24.12 shows a $9,500 positive contribution to overhead for the appliances department. If this department were eliminated, the company would be worse off. Further, the appliance department's manager is better evaluated using this $9,500 than on the department's operating loss of $(500). The company also compares each department's contribution to overhead to budgeted amounts to assess each department's performance. Point: Operating income is the same in Exhibits 24.11 and 24.12 . The method of reporting indirect expenses in Exhibit 24.12 does not change total income but does identify each operating department's contribution to overhead. concept of "departmental contributions to overhead." Answer the following questions: 1. How is departmental contribution to overhead an effective tool in assessing each department's performance? 2. See Exhibit 24.12 on page 1050 of your textbook. Calculate the departmental contributions margin to overhead for each department. Departmental contribution margin to overhead = departmental contributions to overhead/ Sales For example, for the Hardware Department, the departmental contributions margin to overhead would be: $29,400/$119,500 = 24.6% 3. Which department has the highest departmental contributions margin? What does that tell you about the performance of that department relative to the performance of other departments