Overheads Departmentalisation

After collecting and classifying overheads under suitable account headings the next step involved in overhead distribution is the departmentalisation of these overheads to different cost centres on a suitable basis. This involves two stages:

Allocation of overheads: Allocation is the process of charging the full amount of overhead costs to a particular cost centre. This is possible when the nature of expenses is such that it can be easily identified with a particular cost centre. For example, the salary paid to a foreman of a particular production department can be directly identified with that department and therefore it will be directly charged to that department.

Apportionment of overheads: It is the process of splitting up an item of overhead cost and charging it to the cost centres on an equitable basis. This is done in case of those overhead items which cannot be wholly allocated to a particular department. For example, the salary paid to the works manager of the factory cannot be charged wholly to a particular production department will have to be charged to all departments of the factory on an equitable basis.

However, in common parlance no such distinction is observed.

The basis of apportionment and the details of apportionment are mentioned in the card maintained for each Standing Order/Cost Account Number. For example, rent of the factory will be apportioned over various departments of the factory according to the area occupied by each department. The amount of rent which each department has to bear will be mentioned in the standing order number card allotted to rent. The same is true for other items.

Overheads distribution summary

The maintenance of cards for each type of overhead expense considerably helps in preparation of “overheads distribution summary” separately for each major category of overheads i.e. factory, office and selling.

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