Separating & Calculating Gross Profits by Department

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  • 0:04 Separating & Calculating
  • 1:59 Gross Profit by Department
  • 3:15 Gross Profit Percentage
  • 4:54 Lesson Summary
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Lesson Transcript
Instructor: Deborah Schell

Deborah teaches college Accounting and has a master's degree in Educational Technology.

In addition to evaluating the financial performance of the company overall, businesses need information on the profitability of each department. In this lesson, you will learn about calculating gross profit by department.

Separating and Calculating

Ms. Rolle runs Tunes Music Store, where she focuses on selling rock, country and classical music. She knows her store is profitable overall, but she would like to know how much profit each department is making before expenses are subtracted. Let's examine how Ms. Rolle could achieve her objective.

In order to assess profitability, Ms. Rolle would generate an income statement that details the revenues and expenses that her store has incurred. 'Revenue' represents the amount of sales that she has made and 'expenses' represent the costs incurred to make the sales. If revenue is greater than the expenses, then Tunes Music store has made a profit, and if expenses are greater than revenue, then the store has lost money.

In addition to knowing the overall profit made by her company, Ms. Rolle would also be interested in the gross profit. Gross profit represents the difference between the sales revenue and the cost of goods sold. It is the mark-up on a product or service, which the profit earned before operating expenses are deducted. For example, if Ms. Rolle pays $4 to buy a CD and then sells it to a customer for $15, the gross profit (or mark-up) on that sale would be $11 ($15 - $4). Ms. Rolle also incurs other costs, including rent, utilities, salaries for her employees and advertising expenses. These expenses must be deducted from the gross profit when determining the overall profit or loss. Let's examine the income statement for Tunes Music Store for the month of May, which reports revenues and expenses.

Gross Profit - Overall Example

We can see that Tunes Music Store had a gross profit of $12,000 and net income of $5,000 for the month of May, but this presentation does not tell Ms. Rolle which departments had a profit and which may have had a loss. This is where tracking and reporting gross profit by department is helpful.

Gross Profit by Department

In order to calculate gross profit for each of Tunes Music Store's three departments, Ms. Rolle would have to track the sales and costs separately in the company's general ledger. The general ledger is like a filing cabinet where all the individual accounts that are used to report the financial information are stored. For example, Ms. Rolle could have the following accounts:

Sales - Rock;

Sales - Country and

Sales - Classical.

She would also need to keep track of the cost of goods sold by department in order to calculate the gross profit. Let's assume the following information for Tunes Music Store for the month of May:

Sales - Rock: $10,000;

Sales - Country: $7,000;

Sales - Classical: $3,000;

Cost of Goods Sold - Rock: $4,500;

Cost of Goods Sold - Country: $2,500 and

Cost of Goods Sold - Classical: $1,000.

We can now calculate the departmental gross profit.

Gross Profit - Department

The departmental gross profit shows that the rock department had a gross profit of $5,500, country's gross profit was $4,500 and the classical department had a gross profit of $2,000.

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