Definition

Departmentalization of overheads refers to the process of determining the overhead costs of each department involved in production.

Explanation

To achieve departmentalization, the departments in a factory are divided into two categories: production departments and service departments. Also, departmentalization of overheads is undertaken in two stages:

  1. Allocation of overheads
  2. Apportionment of overhead expenses

An overview of these stages is given below.

1. Allocation of Overheads

The process of charging the full amount of overhead costs to a specific cost center is known as the allocation of factory overheads. This is feasible where the nature of expenses is such that they can be simply identified with a particular cost center.

For instance, the salary paid to the foreman of a specific production department can be directly linked to that department, and so it will be directly charged to the department.

2. Apportionment of Overhead Expenses

This technique involves dividing up an item of overhead cost and charging it to the cost centers on an equitable basis. This is feasible for overhead items that cannot be fully allocated to a particular department.

For instance, the salary paid to the director of a large factory cannot be charged fully to a single production department. Instead, it must be charged equitably to all of the factory’s departments.

Frequently Asked Questions

What is the stage of departmentalization of factory overheads referred to as?

The stage of departmentalization of factory overheads referred to as allocation of overhead.

What does it mean by allocation of overheads?

Allocation means charging full amount of overhead costs to a specific cost center. It is also known as direct allocation.

What is apportionment of overhead expenses?

Apportionment means dividing up an item of overheads and charging it to the cost centers on an equitable basis. It can be looked upon as indirect allocation.

Why is departmentalization needed?

The need for departmentalization arises because different types of costs are incurred for allocating the factory overheads.

What are the different types of costs?

There are two types of costs, direct and indirect costs, associated with departmentalization of factory overheads.

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