A Departmental Income Statement shows each departments contribution margin and net income from operating, after all expenses are allocated for. The Departmental Income Statement shows which departments of the company are the most profitable, and which departments are costing the company money. The Departmental Income Statement helps managers and owners evaluate and control the operations of each department. This is important for running a top quality company.
The profitable departments can be expanded to make more profits if they are currently making a profit. The departments that are causing the company to lose money or not gaining enough profits may be cut back, or shut down. The closed department’s income does not dissolve if it is illuminated. The remaining departments absorb the money that was used to fund the closed department.
The contribution margin is important to assist in making managerial decisions. The contribution margin is the gross profit on sales minus direct expenses. The contribution margin can also cover the semi-indirect and indirect expenses. The decisions to retain, eliminate, or expand a department or the business, are based on the results from the contribution margin of the department or product. Without having the Departmental Income Statement it would be harder for the company to figure out where the profits and losses are coming from.
Having the Departmental Income Statement is an essential document in any business. It helps the company run smooth and efficiently. The managers can expand or eliminate departments that are gaining sufficient amounts of money, or costing the company money. [continues]
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