Departmentalization of Overheads

Definition

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

Explanation

For the purpose of departmentalization, departments of a factory are divided into two categories i.e., production departments and service departments. Departmentalization of overheads is done in two stages.

(a) Allocation of Overheads
(b) Apportionment of Overhead Expenses

(a) Allocation of Overhead

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The process of charging the full amount of overhead costs to a specific cost center is known as allocation of factory overheads. This is feasible where the nature of expenses is such that it can be simply identified with a particular cost center. For instance, the salary paid to a foreman of a specific production department can be directly recognized with that department and so it will be directly charged to that department.

(b). Apportionment of Overhead expenses

It is the technique of dividing up an item of overhead cost and charging it to the cost centers on an equitable basis. This is feasible in case of those overhead items that cannot be fully allocated to a particular department. For instance, the salary paid to the works manager of the factory cannot be charged fully to a particular production department but must be charged to all departments of the factory on an equitable basis.

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