MANUFACTURING OVERHEAD

–
DEPARTMENTALIZATION
Need for Departmentalization

In large business, factory operations are divided into

departments. This is called departmentalization. This
provides greater accuracy in job costing and product
costing.
Departmentalization requires the use of different overhead
rates for applying manufacturing overhead.
Manufacturing overhead must also be estimated or
budgeted exept that it is now down by department.
Classification of Departments

Departments are classified into two categories : producing

departments and service departments.
Producing departments are those departments that are
directly engaged in the manufacturing activities (for
example, assembly, finishing and packaging departments)
Service departments are those departments that assist
indirectly by rendering services (for example, purchasing,
medical and maintenance departments) to producing
departments.
Direct Departmental Overhead Costs

Direct departmental overhead costs are those that can be easily

traced to specific departments. Examples are as follows:
Repairs and maintenance – traced to maintenance department
Indirect labor – traced to payroll summaries of a department
Indirect materials – traced through stores requisitions of a department
Depreciation of equipment – traced to department using the
equipment.
Allocating Indirect Departmental Costs

Each department should be charged with its fair share of

the costs determined by the benefits it has received.
Below is a list of some of the indirect departmental costs that require
allocation and the best possible bases usually used.

Indirect Departmental Costs Distribution Bases

Factory rent Square Footage
Depreciation-Factory Building Square Footage
Fire Insurance on building Square Footage
Repairs and maintenance Square Footage
Telephone # of employees or # of telephone
Light Kilowatt hour
Freight In Materials used
Allocating Service Department Cost

Service department’s costs, such as cost of the

procurement and receiving departments, are reallocated
to the producing department since these costs cannot be
directly identified to the products manufactured.
A reasonable base must be use to charge the cost of
operating a service department to the producing
department being served.
Service Departments Allocation Bases
Procurement Number of orders or cost of materials
Receiving Cost of materials; number of units; number of orders
Storeroom Cost of materials; number of requisitions filed;
number of units handled
Factory Office Number of employees; labor hours; labor costs
Personnel Number of employees; labor hours; labor cost
Building maintenance Floor space occupied
Power plant Kilowatt hours of power usage
Assignment
Assume the following data for April

Service Department Allocation Bases

Personnel Number of employees in each producing
department
Building maintenance Floor space occupied by each producing
department
Power plant Kilowatt hours of power usage in producing
department
The following data for each department during April are obtained
Department Costs # Employees Floor Space Kwt Hrs
Service Department
Personnel P3,600 5 1,500 -
Building Maintenance 2,000 4 2,500 -
Power Plant 1,000 2 4,000 -

Producing Department
Machining 11,800 10 10,000 7,000

Assembly 8,600 20 10,000 3,000