Section 1

Departmentalization

• MANAGEMENT CONTROL SYSTEM
• DEPARTMENTALIZED ACCOUNTING SYSTEM
• FIXED EXPENSE
• ALLOCATING FIXED EXPENSES
• ACCOUNTS 8000-8240

Departmentalized accounting, often referred to as profit centering, is a system whereby profits are determined for departments of “centers” within the dealership. The intent of such a system in an automobile dealership, as in any business, is to maximize profits through close, informed management of the individual departments on an ongoing basis. The system is most effective when general management delegates to individual department managers specific responsibilities, including those for sales volume, expense control and operating results of their departments. Planning of sales, expense and profit objectives, conducting operations so as to meet the planned objectives, and reporting actual results against objectives are essential parts of a successful profit-center system.

An accounting system that provides for the recording and reporting, on an accurate and timely basis, of the income, expenses and profit of each department is an indispensable element of a departmentalized profit control system. Comparison of actual results against planned objectives enables the dealership management to:

• Evaluate the performance of each department
• Determine areas not contributing their share of planned profits
• Take timely corrective action as required
• Establish realistic operating plans for future months.

Departmentalized profit control gives department managers a strong interest in profit performance through continued participation in the planning of objectives and through the knowledge that departmental results reflect personal efforts.

The Ford Dealer Financial Statement, Form FMC 100, provides for reporting sales, expense and selling gross in five basic operating departments—New Vehicles, Used Vehicles, Parts, Service and Body Shop.

The Statement also provides for reporting basic income items, basic expenses, and net income for F & I (New and Used), and for Rental and Wholesale Lease portions of the business, on page 3 of the statement. For financial statement purposes, F & I net income is still reported as part of the new and used vehicle departments, and rental and wholesale leasing are reported as additions to income. However, Statement and Chart of Accounts permit dealers to treat these areas as separate departments if they wish. This provides an opportunity to evaluate the managers of these income areas on the performance of their individual operation.

Additional departmentalization—for example, the separation of new or used car from new or used truck—may be achieved by creating subsidiary account numbers. This may be done by changing the last digit of the basic account number, using the following approach and example:

(For financial statement purposes, balances in the two related subsidiary accounts should be combined and reported under the basic account number.)

The same process can be used for all new and used vehicle expense accounts, and for F & I income and expense accounts.

The statement also provides room to allocate fixed expenses to the five basic operating departments. Departmental account numbers have not been specifically assigned in the Chart of Accounts, but you may establish subsidiary account numbers for this purpose by changing the last digit of the basic account number. The following two numbering systems are suggested:

The following principles should be followed in allocating charges and credits to expense accounts:

• Whenever possible, the item should be charged to the department responsible for incurring the expense. For example, long distance telephone charges incurred by the parts manager should be charged to the parts department.
• When an item cannot be identified specifically with one department, it should be apportioned over the responsible departments on an equitable basis. For example, the monthly charge for telephone service, other than long distance and directory advertising, should be distributed on the basis of the number of instruments assigned to each department. Instruments assigned to the dealer, general manager, and office manager, who are responsible for the activities of the whole dealership, should be distributed to UNAPPLIED EXPENSES.
• When all, or a portion, of an expense cannot be identified specifically with the operating departments, or cannot be readily apportioned among the departments on an equitable basis, it should be distributed to Unapplied Expenses. Dealer Salary, Account 8900, is an example of such an expense.
• Items distributed to Unapplied Expenses should be held to a minimum by developing a sound basis for charging expenses to the responsible departments. In this manner, the results of each department will be more accurately determined.

DISTRIBUTION OF EXPENSES BY DEPARTMENT SHOULD BE DONE AT THE TIME THE ENTRIES ARE RECORDED IN THE JOURNALS. THESE ENTRIES ARE MADE EASIER IF THE DEPARTMENTS TO BE CHARGED WITH THE EXPENSES HAVE BEEN INDICATED ON THE ORIGINAL SOURCE DOCUMENT. RUBBER STAMPS, PREPARED TO SHOW THE DEPARTMENT NAME, AND SPACE FOR THE ACCOUNT NUMBER AND AMOUNT, ARE USEFUL FOR THIS PURPOSE. IT FACILITATES POSTINGS OF FIXED EXPENSES FROM THE JOURNALS TO THE PROPER DEPARTMENT IN THE LEDGER AND SUBSEQUENT PREPARATION OF FORM FMC 101 OR FMC 102.

Following are suggestions for allocating fixed expense, dealer salary, additions and deductions from income, and bonus accounts. These suggestions provide reasonably accurate results but there may be circumstances in individual dealerships that will justify using other allocation methods. In this event, the suggested method should be modified.

Account 8000 and 8020, Salaries—General Manager, and Salaries, Administrative

Distribute the salary of each employee charged to these accounts directly to the operating departments based on duties of each employee. Salaries of employees whose duties are such that their earnings cannot be allocated directly to the operating departments (such as the Business Manager), should be distributed to Unapplied Expenses.

Alternative methods are to base the distribution of employee benefits on payroll dollars or number of employees, although these methods are usually less accurate.

Account 8100, Payroll Taxes

Payroll taxes usually can be distributed directly to the operating departments. For example, the employer’s share of FICA taxes would be the same as the amount deducted from the employee. Taxes that cannot be distributed on an actual basis may be allocated on taxable payroll dollars or number of employees, depending on how the tax is computed.

Taxes applicable to employees whose duties are such that their costs cannot be allocated directly to the operating departments should be distributed to Unapplied Expenses.

Account 8200, Pensions

Pension costs usually are based upon a number of factors, including gross earnings, age and length of service of the participants. Each department’s share of pension costs should be based upon its pro rata share of the relevant factors in the specific plan subscribed to by the dealership. Pension costs for employees whose duties are such that their costs cannot be allocated directly to the operating departments, should be distributed to Unapplied Expenses.

An alternative but less accurate, method would be to base the distribution of pension costs upon one or two of the major cost factors, such as the number of participating employees or the gross earnings of participating employees.

Account 8220, Institutional Advertising

Distribute to Unapplied Expenses unless the expense can be traced to specific operating departments.

Account 8240, Institutional Promotion

Distribute to Unapplied Expenses unless the expense can be traced to an operating department.