DEPARTMENTALIZATIO

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Departmentalization
 Dividing the business operations into Departments
 Department may be Producing or Service
Department (Line and Staff)
 The cost incurred by Service Department is called
Service Cost
 Service Cost should be allocated to Producing
Department
Procedures of Departmentalization
 Calculate departmental predetermined overhead
rate
 Apply the predetermined overhead rate to
production in departmental basis
 Record the actual manufacturing overhead costs by
departments in the Departmental Overhead
Analysis Sheet
How to calculate the Departmental Predetermined
Overhead Rate
 Prepare a budget of total direct manufacturing overhead costs of producing
departments and total direct expenses of service departments expected at the
selected activity levels. (Given)
 Conduct a factory survey to determine the bases to be used in allocating indirect

manufacturing overhead costs and service department costs. (Given)

 Set up an application rated worksheet to facilitate cost distribution by departments

 Enter budgeted costs that can be traced directly to specific departments as direct

departmental costs
 Allocate budgeted manufacturing overhead costs that cannot be traced to specific

departments according to the base selected (indirect cost)

 Distribute or reallocate budgeted service department's costs to producing

departments (Direct, Step and Reciprocal or Algebraic Method)

 Compute departmental predetermined rated by dividing the total budgeted overhead

costs charged to each producing department by the base selected

Note Total Direct Manufacturing Overhead are overhead costs that are traceable to
producing departments.
Direct Method
 Service costs are allocated to Producing
Departments only
 Simplest of all the methods
Step Method
 Service costs are allocated to both Service
Departments and Producing Departments
 Once the service cost of a service department is
already allocated, it can no longer participate in the
preceding allocations.
 Allocation is done sequentially by choosing service
department
Reciprocal Method
 Service costs are allocated to both service
department and producing department using an
algebraic equation.
 Algebraic Equation will be based on the cost driver
or basis of allocation
 Allocation can be done simultaneously
Comprehensive Problem
The Val Company has two service departments and
two producing departments. The following are the
overhead costs of each department:
Service Department
Factory Administration 129,000
Building and Grounds 105,000
Producing Departments
Machinery 416,000
Assembly 380,000
Comprehensive Problem
Additional Information:
Department Estimated Total Square Footage
Labor Hours
Factory Administration - 1,200
Building and Grounds 1,100 -
Machinery 2,000 1,900
Assembly 1,600 3,200

The costs of factory administration are allocated based on

estimated labor hours; building and grounds costs are
allocated based on square footage. The producing
Department uses machine hours, with 30,000 for
amchinery and 22,800 for assembly.