COST ACCOUNTING

ASSIGNMENT NO 3

SUBMITTED BY
RAHAT AKHTAR KHAN

CLASS: BBA-4A

REG NO: FA19-BBA-008

SUBMITTED TO
SIR ZAFAR IQBAL
Factory overhead departmentalization for product
costing and cost control
1. The concept of departmentalization

Definition:
Operating the door above the factory means dividing the plant into
parts called departments, a cost center, or a cost pool, where costs are charged.
For accounting purposes, separating the crop into a separate department
provides more accurate labor and product costs as well as proper cost control.
The functioning of the department involves collecting activities with individuals in
groups, allowing organizations to grow indefinitely, at least in theory. The
formation of departments refers to the formal structure of the organization, which
is made up of different categories and roles of management, and their
relationships Reduction in corporate flexibility, flexibility, and performance units.
Departmental division is an effective and efficient workforce mobilization into
meaningful work units to organize multiple activities and achieve organizational
goals faster.

2. Producing and service departments

Departments of factory are divided into two main categories. These are
producing department and service department.

Producing department:
It participates in the actual design of a product by
changing the composition, form, or type of material used, or by combining parts
into a finished article. The factory services department is the one that is not
directly involved in the production but offers some kind of work to other
departments. In some cases, the services provided support to other service
departments and production departments. The cost of using the services
department is part of the whole factory and should be included in the cost of the
product at the highest factory level.

Example:
cutting, planning, assembly, machining , mixing, receiving,
inspection, storerooms, maintenance, timekeeping, payroll, cost accounting,
budgeting, data processing, general office, cafeteria, and plant protection.

Service department:
Provides a service that contributes indirectly to the use
of the product but does not change itself. A productive department is where
handicrafts and machinery are made directly in all parts of the finished product.
Manufacturing departments, such as machinery, construction, lifting, or
assembly, are examples of departments whose costs could not be charged for a
product because they contributed directly to its development.
Manufacturing departments are often divided into cost centers. The separation of
cost centers improves the cost of a product where two or more types of
equipment operate on the same product within the same department. The
department that produces "Carding," for example, in the manufacture of cotton
thread and fabric, can be divided into cost centers: opening cotton bars, picking,
card inserting, drawing and holding, etc.
Both the service department and the manufacturing department will play an equal
role or contribution to the success of the organization. The structure, form, or
type of object is transformed into a masterpiece.

Example:
medical, shipping, storage, purchasing, receiving.

3. Direct and Indirect departmental expenses:

Direct departmental expenses:

“Direct” as the name suggests are those costs that are fully related and allocated
to the company’s core business activities. They are closely related to the
purchase and production of goods/services. Direct costs are part of the principal
cost or cost of goods/services sold by the company.
The direct costs are directly related to the production of the product sold or the
service provided, it may vary from different types of companies, such as
manufacturing companies, construction companies, service companies, etc.

Examples of Direct Expenses

 Wages
 Factory rent
 Cost of raw material
 Premises renting
 Fuel
 Carriage inwards

Indirect expenses departmental:

Unlike direct, indirect costs are not directly related and assigned to the core
business functions of the company. Indirect costs are required to keep the
business running, but they cannot be directly related to the cost of revenue-
generating products or services.
Like direct costs, indirect costs can also vary for different types of organizations.
This is usually the cost-shared between the various departments/components
within the company.

Examples of Indirect Expenses

 Salaries
 Telephone bills
 Printing & stationery
 Legal & Accounting charges
 Carriage outwards

4. Establishing departmental overhead rates.

Industrial collection is often used on the basis of direct labor dollars or hours
when a single factory measure is used for the whole plant because this process
is considered the simplest and most acceptable. The use of high-level
departmental doors requires separate consideration of the head of each
productive department which often leads to the use of different over-the-counter
bases for different departments. For example, it is possible to use the average
operating hours of one department and the average machine hours in another.
Other refinements may lead to different bases and prices of cost centers within
the same productive department.
In setting the high prices for manufacturing departments, all factory units,
whether standard or service departments, must eventually enter the
manufacturing departments. Additional charges levied directly on the production
or service department may be derived from previous records or from new or
revised estimates prepared by the budget or expenditure department in
consultation with the head of the department. General factory costs, such as
heat, energy, water, rent, etc., should first be allocated to the production and
auxiliary departments or perhaps just to the production departments. The method
depends on the decision of the management.
In setting high departmental prices, the costs of service departments should be
equitably distributed to production departments and service departments or to
productive departments only. Distribution may be based on the number of
employees, the use of kWh, the use of HGH, the floor area, the number of goods,
the cost of materials that will be needed, etc. After the costs of the services
department are distributed, the production of the department's higher prices can
be calculated by directing the working hours, the specific operating costs,
machine hours, or any other relevant reason.
At the end of the financial period, the actual production costs and departmental
and non-departmental environmental services are also collected in the same way
as the factory standard at the beginning of the year. When all of the above is
integrated into productive departments, it is possible to compare the actual and
the above and determine more or less of the industry.
In this way, we multiply the average departmental measure by the number of
units of operation used.

For example:
if the production department charges $ 20 per hour for machinery,
and the operator uses 3 hours of machine time, the maximum allocation will be
20 * 3 = 60 $.

5. Overhead departmentalization in non-manufacturing

businesses and nonprofit organization

Proper management of departmental costs is equally important for non-

productive activities. The following major complex companies should be divided
into administrative and administrative departments, categories, or service units
for cost planning and cost control.

Retail or department stores:

They work for years in departments by organizing their organizations under the
following common topics: management, residency, marketing, and advertising
promotion, procurement, marketing, and delivery. These groups charge the same
costs as those that produce businesses. The “residential” group is almost
identical to a typical factory and includes extended property renovations, rent,
rent, building insurance, and existing facilities. And similar to factory procedures,
group costs are incurred in sales departments that generate revenue at charging
or billing rates.

Financial institutions:

The banking, savings, and loan organizations, and brokers' houses) should set
up a department in their organizations to control costs and establish a profit
margin for individual services. The size of the facility and the type of services
provided determine the department's value. The collection of departmental
expenses also follows industry acquisitions.
a. direct costs such as salaries, assets, and equipment reductions are
directly charged.
b. General costs such as light, heat, and air conditioning are paid to
the department on appropriate grounds.
As revenue and expenses are received, it is possible to create an operating
expenses unit that allows accounts to be charged for services rendered and for
account profit analysis.

Insurance companies:
The work of insurance companies is done by dividing the office into departments.
Some departments have several hundred secretaries, and the work is very
orderly. Insurance companies were one of the first to install large digital
computers to reduce the cost of communications related to the insurance
business and to calculate new insurance rates and access to an expanded
standard profit. This discontinuation of detailed departments may include actuary,
premium collection, group insurance, medical and legal details. While some costs
are different for each group most are similar to the costs incurred in any office
department.

6. Use of departmental factory overhead rates.

In a financial year, as information becomes available at the end of each week or

each month, the top factory is used for the job or product by adding the amount
used above in the top section of the worksheet or production report. The prices
used should be summarized from time to time to be included in a standard
journal. A summary that applies to DeWitt products will appear as follows;

Work in process 285000

Applied factory overhead –cutting department (42010 direct 84020
labor hours x 2)
Applied factory overhead – planning department (17000 54400
machine hours x 3.20)
Applied factory overhead – assembly department 111700 67020
direct labor cost x 60%)
Applied factory overhead – upholstery department ( 44200 79560
direct labor hours x 1.80)

The above-mentioned accounts used here are used. Submissions may also be
performed directly in each departmental factory management account.

7. Actual factory overhead and Over , under applied factory

overhead departmentalization:

Actual Overhead

Actual overhead indirect factory costs incurred. This is actually for all factory
costs, excluding direct costs and direct labor costs. Actual overhead may differ
from over-use, which may be based on a typical head level that differs
somewhat from the actual overhead value obtained.
Examples of Actual Overhead

Examples of high costs are equipment maintenance, factory degradation,

factory insurance, factory rental, factory property taxes, factory utilities,
salaries of production managers, and manufactured goods.

Overand under applied factory overhead departmentalization:

Overhead or overused production overhead is defined as the difference

between the production costs incurred in operating the process and in
producing the actual head costs generated over time.

If the production cost used to process the process exceeds the production
costs incurred over a period of time, the difference is known as the over-
production production head. On the other hand; if the production costs used to
process the process are less than the higher production costs incurred in time,
the difference is known as the misused production head.

High frequency or low consumption is common in the manufacturing industry

because more is used to process processes using a predetermined rate. The
pre-determined rate is calculated at the beginning of the period using the
estimated information and is used to apply the cost of overtime at all times.

The process of making a computer a fixed rate and its use in over-production is
described in the context of "measuring and recording the cost of making a
product".