What is Departmental Accounting?

Departmental accounting is an accounting method that allocates costs and revenues to different departments or divisions within a company. This allows management to measure profitability and efficiency at the departmental level, and is an important tool for internal management and control.

What is Departmental Accounting?

Departmental accounting, also called divisional accounting or segment accounting , is an extension of traditional accounting where the business is divided into smaller units to gain better insight into:

• Profitability per department: Which departments contribute the most to the result
• Cost-effectiveness: How efficiently each department uses its resources
• Resource allocation: Where resources should be allocated for optimal returns
• Performance measurement: How each department performs against goals and budget

Departmental accounting builds on the principles of operating accounting , which focuses on operational income and expenses, but breaks these down to the departmental level for more detailed analysis and management.

To gain a complete understanding of profitability analysis, it is important to understand the concept of gross profit in general and gross profit in particular as the basis for assessing each department's contribution to the company's overall profitability.

Main principles in Departmental Accounting

Direct Costs

Direct costs can be linked directly to a specific department:

• Salary: Employees who work for only one department
• Materials: Raw materials and consumables used by the department
• Equipment: Machines and tools belonging to the department
• Travel expenses: Travel related to the department's activities

Indirect Costs (Common Costs)

Indirect costs must be allocated between departments based on allocation keys:

• Rent: Often divided by area or number of employees
• Electricity and heating: Can be distributed by area or consumption
• Administration: Distributed by turnover or number of employees
• IT costs: Distributed by number of users or computer equipment

Distribution keys for Common Costs

The choice of distribution key is critical to getting a true picture of each department's profitability:

Cost category	Common Distribution Keys	Benefits	Disadvantages
Rent	Area, number of employees	Easy to measure	Does not always reflect actual usage
Payroll administration	Number of employees, salary amount	Logical connection	Can penalize departments with highly educated employees
IT costs	Number of PCs, users	Direct connection	Does not reflect complexity
Marketing	Turnover, number of customers	Following benefit	May be unfair to new departments
Current	Area, number of employees	Easy to implement	Does not reflect actual consumption

Methods for Departmental Accounting

1. The contribution method

Focusing on contribution margin per department:

 Avdelingens inntekter
 - Avdelingens variable kostnader
 = Dekningsbidrag

 Dekningsbidrag for alle avdelinger
 - Felles faste kostnader
 = Totalt resultat

Advantages: - Shows each department's contribution to covering fixed costs - Avoids arbitrary allocations of fixed costs - Easier to understand and implement

2. The full cost method

Allocates all costs to the departments:

 Avdelingens inntekter
 - Avdelingens direkte kostnader
 - Andel av indirekte kostnader
 = Avdelingens nettoresultat

Advantages: - Provides a "complete" picture of each department's profitability - Easier to compare with external benchmarks - Motivates cost awareness

Practical Implementation

Step 1: Define Departments

The departments must be clearly demarcated and have: - Own management or responsible person - Identifiable income or expenses - Possibility of influencing the outcome - Sufficient size to justify follow-up

Step 2: Identify Costs and Income

Direct records: - Salaries for employees in the department - Materials used by the department - Equipment and machinery belonging to the department - Travel and other direct expenses

Indirect items that must be allocated: - Rent and local costs - Joint administration - IT and communication - Marketing and sales

Step 3: Choosing Distribution Keys

Example of distribution keys for a consulting company:

Department	Employees	Area (m²)	Turnover	PCs
Consulting	8	120	4,000,000	8
Revision	6	90	3,000,000	6
Treasure	4	60	2,000,000	4
Administration	2	30	-	2
Total	20	300	9,000,000	20

Detailed Example: Consulting Company

Let's look at a practical example with a consulting company that has three departments:

Direct Income and Expenses

	Consulting	Revision	Treasure	Total
Revenue	4,000,000	3,000,000	2,000,000	9,000,000
Payroll directly	2,400,000	1,800,000	1,200,000	5,400,000
Materials	80,000	60,000	40,000	180,000
Travel	120,000	90,000	60,000	270,000

Common costs to be distributed

Cost	Amount	Distribution key	Consulting	Revision	Treasure
Rent	600,000	Area	240,000	180,000	120,000
Administration	800,000	Employees	320,000	240,000	160,000
IT costs	200,000	PCs	80,000	60,000	40,000
Marketing	300,000	Turnover	133,333	100,000	66,667

Result per Department (Full Cost Method)

	Consulting	Revision	Treasure	Total
Revenue	4,000,000	3,000,000	2,000,000	9,000,000
Direct costs	2,600,000	1,950,000	1,300,000	5,850,000
Indirect costs	773,333	580,000	386,667	1,740,000
Total costs	3,373,333	2,530,000	1,686,667	7,590,000
Net profit	626,667	470,000	313,333	1,410,000
Profit margin	15.7%	15.7%	15.7%	15.7%

Analysis and Follow-up

Key figures for Departmental Analysis

Profitability figures: - Profit margin: Net profit / Revenue - Coverage ratio : Contribution margin / Revenue - Return on invested capital: Profit / Invested capital

Efficiency figures: - Revenue per employee: Revenue / Number of employees - Costs per employee: Total costs / Number of employees - Productivity: Units produced / Working hours

Growth figures: - Revenue growth: Change in revenue from last year - Market share: The department's share of total revenue - Customer growth: Change in number of customers

Reporting and Follow-up

Monthly reporting: - Results against budget - Development in key figures - Deviations and explanations - Action plans

Quarterly analysis: - Deeper analysis of deviations - Benchmarking against other departments - Assessment of distribution keys - Strategic measures

Challenges and Pitfalls

Common Problems

Wrong distribution keys: - Uses allocation keys that do not reflect actual resource use - Does not change distribution keys when the business changes - Uses too simple keys that don't capture the complexity

Motivation problems: - Department managers focus only on their own results - Sub-optimization at the expense of the whole - Resistance to sharing resources with other departments

Technical challenges: - Lack of systems to collect data - Time-consuming manual reporting - Inconsistent reporting between departments

Solution strategies

Improve distribution keys: - Use activity-based costing (ABC) - Review and update keys regularly - Involve department managers in the selection of keys

Balancing performance management: - Combine departmental goals with corporate goals - Rewards based on both departmental and overall results - Promote collaboration between departments

Invest in systems: - Implement integrated ERP systems - Automate data collection and reporting - Standardize reporting formats

Legal and Tax Aspects

Accounting Act Requirements

The Accounting Act does not require departmental accounts, but: - Larger companies must provide segment information in their annual reports - Group must report per business area and geographical segment - Listed companies have stricter segment reporting requirements

Tax Consequences

• Departmental accounting does not affect taxable income
• Can be used to document the arm's length principle within a group
• Important for transfer pricing between companies in the same group

Digital Tools and Systems

ERP systems

Modern ERP systems support departmental accounting through: - Dimensions: Automatic coding of transactions - Cost centers: Distribution of costs to departments - Reporting: Standardized reports per department - Budget: Budget follow-up per department

Specialized Tools

• Business Intelligence (BI): Advanced analytics and dashboards
• Activity-Based Costing (ABC): More Accurate Cost Allocation
• Balanced Scorecard (BSC): Combines financial and non-financial goals

Best Practices

Implementation

1. Start simple: Start with a few departments and simple distribution keys
2. Involve management: Secure support from senior management
3. Train staff: Provide training in principles and systems
4. Test and adjust: Continuously evaluate and improve the system

Operation

1. Regular reporting: Monthly reports with analysis
2. Benchmarking: Compare with industry standards
3. Continuous Improvement: Update Methods and Systems
4. Communication: Share insights across the organization

Future Trends

Technological Developments

• Artificial Intelligence: Automatic cost driver identification
• Real-time reporting: Continuous updating of department results
• Predictive analytics: Forecasts based on historical data
• Mobile solutions: Access to reports on mobile devices

Methodological Developments

• Activity-based costing: More accurate cost allocation
• Lean accounting: Focus on value-creating activities
• Sustainability accounting: Inclusion of environmental and social factors

Related Concepts

To fully understand departmental accounting, you should also familiarize yourself with:

• Accounting - Basic accounting principles
• Fixed assets - Distribution of depreciation by departments
• Working Capital - Capital Allocation by Department
• Acquisition cost - Cost calculation for departmental assets

Conclusion

Departmental accounting is a powerful management tool that provides management with detailed insight into each department's contribution to the company's overall performance. By implementing a good departmental accounting system, companies can:

• Identify profitable and unprofitable departments
• Optimize resource allocation
• Improve decision-making
• Motivate department managers to better performance

Success with departmental accounting requires the right allocation keys , good systems and committed management at all levels. With modern technology, it is becoming increasingly easier to implement and operate advanced departmental accounting systems that provide valuable insights for better management and control.