NECO Accounting 2022 Theory — Question 4

Model answer

(a) Accounts prepared by head office for the branch: 1. Memorandum branch account 2. Goods sent to branch account 3. Profit and loss account 4. Branch stock account 5. Branch adjustment/branch mark-up account (Any three of the above) (b) Methods of pricing goods charged to branches: 1. At Cost Price: the head office charges goods out to branches at cost price. This method is good when goods are perishable or when it would be difficult to determine an appropriate selling price; the exact result of the branch's operation can be assessed because the cost price is used, although the check imposed by comparing against a selling price is not available. 2. At Selling Price: goods are accounted for by the branch at the fixed selling price. This is usually adopted where goods are sold at specific/proprietary prices; it is not suitable for perishable goods, but its advantage is that head office can keep an effective check on stock issued and cash received. 3. At Cost Plus a Percentage: this is the most effective method - goods are charged to the branch at cost plus a fixed percentage (mark-up), providing a reasonably reliable check on cash and stock; the gross profit will be disclosed by the accounts. (c) Reasons for preparing departmental accounts: 1. The gross profit of each department can be ascertained. 2. An unprofitable department will be revealed. 3. The result of each department's operations can be used to assess/pay the managers of each department. 4. The progress of each department can be monitored. 5. It serves as an incentive for hard work, because an efficient department can be identified and encouraged. 6. It provides investors and outsiders with adequate information for their decisions.