Departmentalization of Overheads

Written by True Tamplin, BSc, CEPF®

Reviewed by Subject Matter Experts

Updated on March 03, 2023

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:

  • Allocation of overheads

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.

Departmentalization of Overheads FAQs

About the Author

True Tamplin, BSc, CEPF®

True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.

True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.

To learn more about True, visit his personal website or view his author profiles on Amazon, Nasdaq and Forbes.