Each party should bear an equitable share of the allocated costs. Explanation For the purpose of departmentalization, departments of a factory are divided into two categories i.e., production departments and service departments. This process helps the management in ascertainment of cost of each department and control of expenses. There may also be products which require many hours of processing, but they occur in low cost departments. This process helps the management in ascertainment of cost of each department and control of expenses. Departmentalization by purpose is a method of organizing work by grouping together people who are responsible for achieving a single purpose. In this lecture, you will learn about the overheads, what is the purpose of departmentalization of overheads. The overheads are allocated on the basis of ability of each department to bear the expenses. For example: Power expenses. Here, the cost of service department means the apportioned overheads plus direct materials plus direct labour and direct expenses of concerned service department. 5 and number of managerial and supervisory staff are to be considered while installing cost accounting. - Organizational segments are defined based on the grouping of similar functions or activities. The choice of departmentalization basis is influenced by the factors such as the degree of specialization, coordination, control, cost consideration, adequate attention to key areas, etc. The basis for cost allocation is neutral. Accounting Principles of Cost Accounting During the month, a company with no departmentalization incurred costs of $45,000 for materials, $36,000 for labor, and $22,500 for factory overhead. The basis is determined according to the extent of services derived by the departments or benefits available to the department. This method allocates service costs to the operating departments and other service departments in a sequential process. For example, the sales staff works together in the sales department or the accounting staff works together in the accounting department. Departmentalization is the grouping of jobs in one area in an organization. In a foundry, for instance, the melting of metal demands single or output cost whereas other operations may demand multiple costs. As the name suggests these costs remain the same irrespective of the production quantities. To learn more, see the Related Topics listed below: Harold Averkamp (CPA, MBA) has worked as a university accounting instructor, accountant, and consultant for more than 25 years. With either procedure, departmentalization of materials, labor, and factory overhead costs facilitates application of responsibility accounting. For instance, the assembly and packing departments of a manufacturer are likely to have very low overhead cost rates. (a) Allocation of overheads: The process of charging the full amount of overhead costs to a specific cost centre is known as Allocation. If a cost is incurred for two or more divisions or departments then it is to be apportioned to the different departments on the basis of benefit received by them. This process is called departmentalization of overhead. Managerial Accounting. These groups receive costs similar to those in manufacturing businesses. Search for: Step Method of Allocation. Computing unit cost During the month, a company with no departmentalization incurred costs of $45,000 for materials, $36,000 for labor, and $22,500 for factory overhead. According to ICMA, London, allocation of expenses means. These have several employees who carry out a similar type of activities for the betterment of their company. A decision is taken on the basis of neutral allocation of overhead; certainly, there is a possibility of optimum utilization of resources. Moreover, the cost of production of goods and services is ascertained or jobs passed through the departments or services rendered by the departments. This type of costing is based on the principle of dividing all costs into fixed cost and variable cost. Company A has two production departments, grinding and refining, as well as two service departments, maintenance and general manufacturing. The departmentalizing of manufacturing overhead costs allows for better planning and control if the head of each department is held responsible for the costs and productivity of his or her department. The overhead, which can be easily identified with a particular department that is charged only to the specified department, is called allocation. Two particular things need to consider before setting the formal structure of the organization or the Departmentalization. For example, a manufacturing company may create a production department, sales and marketing department, an accounting department, and a human resources department. This process is called departmentalization of overhead. The departmentalizing of manufacturing overhead costs also allows for the computation and application of several departmental overhead cost rates instead of having a single, plant-wide overhead rate. The primary disadvantage of PRODUCT departmentalization is ____ leading to higher costs; another is the challenge of ____ across the different product departments. The nature of manufacturing operations in firms using process or job order cost procedures is usually such that work on product takes place in several departments. Variable costs change in relation to production levels. Overhead | Allocation | Apportionment | Departmentalization | Criteria, Criteria for Overheads allocation and Apportionment, Elements of Cost in Cost Accounting with Example, Cost Accounting | Procedure for allocation of Indirect Cost, Labour Cost | Meaning | Classification | Labour cost control, Cost Accounting | Brief History | Objectives | Functions, Process Costing | Principles | Features | Objectives | Application, Batch Costing | Meaning | Economic Batch Quantity | Applicability, Weaknesses of Trade Union Movement in India and Suggestion to Strengthen, Audit Planning & Developing an Active Audit Plan – Considerations, Advantages, Good and evil effects of Inflation on Economy, Vouching of Cash Receipts | General Guidelines to Auditors, Audit of Clubs, Hotels & Cinemas in India | Guidelines to Auditors, Depreciation – Meaning, Characteristics, Causes, Objectives, Factors Affecting Depreciation Calculation, Inequality of Income – Causes, Evils or Consequences, Accountlearning | Contents for Management Studies |. Retail or department stores have practiced departmentalization for many years for cost planning and control by grouping their organizations under the following typical headings: administration, occupancy, sales promotion and advertising, purchasing, selling, and delivery. the allotment of whole items of cost to cost centres or cost units. The process of determining how activities are to be grouped is called departmentalization. customer departmentalization organizing work and workers into separate units responsible for particular kinds of customers the allotment to two or more departments or cost centers of proportions of common items of cost on estimated basis of benefit received. One big advantage of departmentalization, in addition to easier estimation, is that a different but proper method of cost may be followed for each department. Division of labour creates specialists who need coordination. The basis for allocation of overheads is just and fair to all parties involved. 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