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