Departmentalized

Overhead
Chapter 7 (PART 2)
 Departmentalized
Overhead
Factory overhead should be
budgeted for each department.
2 categories of departments
Service Departments
Producing Departments
Departmentalized Overhead rates
are for producing departments only.
 Producing Departments

Include Production Lines

Are cost accumulation centers in
which work is performed directly on
goods being produced.
 Service Departments

Include activities such as

maintenance, personnel,
employee services, and the
provision for heat, light, water,
and power.
Steps in Computing
Departmentalized Overhead Rate

 Divide the company into departments, or

cost centers
 Estimate the factory overhead for each
department. (direct departmental
charges + indirect departmental charges)
 Select and estimate the base to be used
by each dept.
 Allocate the service department costs to
the producing departments.
 Compute the factory overhead rate.
Common Costs

Labor Related
Machine Related
Space Related
Service Related
 Labor Related Common Costs

Common Cost Allocation Base

Supervision # of employees,
payroll amount
of direct labor
hours
Personnel # of employees
Services
 Machine Related Common Costs

Common Cost Allocation Base

Insurance on Value of equipment
Equipment
Taxes on equipment Value of equipment

Equipment Machine-hours,
depreciation equipment value

Equipment Number of machines,

maintenance machine hours
 Space Related Common Costs

Common Cost Allocation Base

Building rental Space occupied

Building insurance Space occupied

Heat and Air- Space occupied,
conditioning volume occupied
Concession rental Space occupied and
desirability of location
Interior bldg. Space occupied
maintenance
 Service Related Common Costs

Common Cost Allocation Base

Materials handling Quantity or value of
materials
Billing and Accounting Number of
documents
Indirect Materials Value of direct
materials
Methods of Allocating Service
Department Costs to Producing
Departments
 Problem 5
Thermal Corporation has 2 producing departments and 2 service
departments labeled P1, P2, S1, and S2, respectively. Direct Cost
for each department and the proportion of service costs used by
various departments are as follows:

Proportion of services used by:

Cost Direct S1 S2 P1 P2
Center Costs
P1 P 90,000

P2 60,000

S1 20,000 0 0.8 0.1 0.1

S2 32,000 0.2 0 0.5 0.3

 Problem 5 (continued)
In calculating predetermined overhead rates,
machine hours are used as the base in P1 and direct
labor hours as the base in P2.

P1 P2
Machine Hours 50,000 40,000
Direct labor Hours 40,000 20,000
 Requirement
Allocate the service department costs to
operating departments and compute the
factory overhead rate for P1 and P2 using
the following methods:
Direct Method
Step Method –start with S1
Algebraic Method
Assume the company uses just one basis for
applying overhead to jobs going through
both P1 and P2, compute the overhead rate
using direct labor hours as base.
Solution
Solution
Solution
 Problem 6
The ABC Company has 2 service departments
and 2 producing departments.

Service Department
Department 1 –Repair P14,000
Department 2 –Cafeteria P11,000

Producing Department
Department A –Machinery P52,500
Department B –Assembly P48,000
 Problem 6 (continued)
Department Square feet Direct labor hours
Repair 1,500 3,500
Cafeteria 1,800 1,200
Machinery 2,000 2,300
Assembly 3,000 1,700
Total 8,300 8,700

The costs of Repair Dept. are allocated on the basis of square feet.
The costs of Cafeteria Dept. are allocated on the basis of estimated
DL hours.

The producing department uses estimated DL hours: 1500 –Dept. A

1250 –Dept. B
Solution
 Problem 7
Central Parkway Corp. has 2 producing departments and 2
service departments labeled P1, P2, S1, and S2, respectively.
Direct Cost for each department and the proportion of service
costs used by various departments are as follows:

Proportion of services used by:

Cost Direct S1 S2 P1 P2
Center Costs
P1 P 120,000

P2 80,000

S1 25,000 0 0.25 0.50 0.25

S2 10,000 0.1 0 0.50 0.40

Solution