Chapter: 10

Factory overhead
-Departmentalization

1
Departmentalization of factory
overhead costs:
It means dividing the whole plant into
segments, called departments or cost centers
to which factory overhead costs are to be
charged.
For accounting purposes, dividing a plant into
separate departments provides more accurate
costing of jobs and products and proper
control of factory overhead costs.
2
 Classification of whole plant into
departments:
We divide the Plant into the departments
broadly into two main groups.
1-Producing/manufacturing
departments
2-Service departments

3
1. Producing departments:
Those departments which manufacture the products i.e.
convert raw materials into finished goods.
For Foundry Company for example: melting department,
molding department, finishing department.
For Textile company for example: Spinning department,
weaving department, dyeing department, printing
department, finishing department, stitching department, etc.
2.Service departments:
Those departments who render services to the producing
and as well as services departments. For examples:
electric department, maintenance department, store
department, security department, etc. in any type of
industry. 4
Departmental factory overhead expenses:
It can be classified into two sub groups, as under:
1. Direct departmental factory overhead
expenses in producing and service
departments:
Those factory overhead expenses which can
easily and conveniently be charged to
producing or service departments directly.
For examples: supervisors’ salary, indirect
materials, indirect labor, factory supplies etc.
5
2. Indirect departmental factory overhead cost
expenses in producing and service departments:
Those factory overhead expenses which can not easily and
conveniently be charged to producing or service departments,
but are allocated and apportioned to them on some suitable
and equitable basis.
Examples are: Rent of whole plant building, insurance of whole
factory building, electricity charges of whole factory building,
telephone charges of whole plant building, property tax of
whole plant building, etc.
 Note:
These indirect factory overhead expenses are first allocated to
all departments before distributing service departments’
expenses to production departments, which is the most
important task of factory overhead departmentalization. 6
Distributing of service departments total factory
overhead costs to producing departments &
determination of factory overhead rates of all
producing departments:
The service departments total factory overhead costs
charged during the period should ultimately be
distributed to producing departments on some
equitable basis and then next step is to determine
the factory overhead rates departmental wise.
This is done because service departments give
services to producing and other service
departments and do not produce the goods.
►This is the most important task of this chapter
7
General rule of distribution:
Rule # 1:
Service departments’ total expenses
should be distributed to producing
departments and as well as other
service departments on the basis of
its services used by the respective
departments irrespective of
producing or service depts. 8
General rule of distribution:
Rule # 2:
Service department’s expenses should be distributed to
producing departments only on the basis of its services
used by the respective producing departments only.
This procedure avoids much clerical work.

Note: To implement these above rules, a decision must be

made about which service department should be closed
first and then onward. Moreover, after a service
department’s expenses have been allocated, no expenses
are assigned back to it again.
►See format on next page 9
 Dewan Engineering Limited
Distributionn of factory overhead cost of serviceDepartments
to Production Departments And, Calculation of
Production Departmental Factory overhead rates
“Producing departments” “Service departments”
Mixi Moldi
Particulars Production Finis Maint Boiler Store Total
-ng depts
n-g
h-ing Service
e- Depts
shop
nance

Total FOH costs xx xx xx xx xx xx xx

►Note:

Now, Service departments factory overhead expenses

will be distributed to Production departments on the
basis of rule: 1 or rule: 2 , but it will be given in the
question. Onward factory over head rate be
calculated by dividing the base given.
………… ………. 10