Factory Overhead Departmentalization

DEPARTMENTALIZATION-Allocation and apportionment.

            When all the items are collected properly under suitable account headings, the next steps is allocation and apportionment of such expenses to cost centres. This is also known as departmentalisation or primary distribution of overhead.

            A factory is administratively divided into sub-divisions known as departments for running it smoothly and efficiently. This subdivision is done in such a manner so that each department represents a division of activity of the concern such as repairs department, power department, tools department, stores department, cash department, cost department etc. The following factors must be taken into consideration while organising a concern into a number of departments:

  1. Every manufacturing process is divided into its natural divisions in order to maintain natural flow of raw materials from the time of its purchase till its conversion into finished goods and sale.
  2. For ensuring smooth flow of production, the sequence of operations are taken into consideration while determining the location of the various departments.
  3. For physical control on production and maintaining efficiency of the concern, division of responsibility must be taken into consideration while organising departments. Division of responsibility as far as possible should be clear, without ambiguity and dual control.

Types of Departments

            In a manufacturing concern, there are three types of departments:

  1. Manufacturing or Producing departments.
  2. Service departments.

(a) Producing departments

            A department where actual process of manufacturing is carried on is called manufacturing or producing department. It covers direct manufacture and is engaged in converting raw materials into finished goods by performing some manual and/ or machine operations on any part of the product. The number of such departments and their number will depend upon the nature of industry, type of work performed and the size of the factory. For example, in steel rolling mill, Hot Mill, Cold Mill, Pickling Shop, Annealing Shop, Hardening, Polishing and Grinding are the producing departments.

(b) Service departments

            Service department is an auxiliary and is not directly engaged in production though its existence is very essential for smooth and efficient running of production departments. Such departments are not directly engaged in the conversation of raw materials into finished goods. Such department (as electricity or repairs and maintenance) renders a particular type of service for other departments.

            The number of departments in a factory and names to be assigned to them depend upon size of the factory, nature of industry and the nature of services rendered. The service departments common to most concerns are stores, cost office, personnel department, planning and progress department, tool room, hospital and dispensary, machine maintenance and electrical maintenance section etc.

BASES OF APPORTIONMENT

            Suitable bases have to be found out for apportioning the items of overhead cost to production and service departments and then for reapportionment of service departments costs to other service and production departments. The basis adopted should be such by which the expenses being apportioned must be measurable by the basis adopted and there must be proper correlation between the expenses and the basis. So the common expenses have to be apportioned or distributed over the departments on some equitable basis. The process of distribution is usually known as Primary Distribution. The following are the main basis of overhead apportionment utilised in manufacturing concerns.

(i) Direct allocation

            Overhead are directly allocated to various departments on the basis of expenses for each department respectively. Example are overtime premium of workers engaged in a particular department, power, when separate meters are available, jobbing repairs etc.

(ii) Direct Labour Hours

            The overhead expenses are distributed to various departments in the ratio of total number of labour hours worked in each department according to this basis. For example, administrative salaries and particularly salaries of the supervisors are apportioned on the basis of labour hours worked. This is so because time is an element of cost in these cases.

(iii) Direct Wages

            According to this basis, expenses are distributed amongst the departments in the ratio of direct wage bills of the various departments. This method is used only for those items of expenses which are booked with the amount of wages e.g. workers’ insurance, their contribution to provident fund, workers compensation etc.

(iv) Number of Workers.

            The total number of workers working in each department is taken as a basis for apportioning overhead expenses amongst departments. Where the expenditure depends more on the number of employees than on wage bill or number of labour hours, this method is used. This method is used for the apportionment of canteen expenses, welfare

and recreation expenses, time keeping, medial expenses etc.

(v) Relative areas of departments

            This basis is adopted for the apportionment of certain expenses like lighting and heating, rent, rates, taxes on building, air conditioning etc.

(vi) Capital Values

            The capital value of certain assets like machinery and building are used as basis for the apportionment of certain expenses under this basis. Examples are rates, taxes, depreciation, insurance charges of the building etc.

(vii) Light Points

            This is used for apportioning lighting expenses.

(viii) Kilowatt hours

            This basis is used for the apportionment of power expenses.

(ix) Technical estimates       

            This basis of apportionment is used for the apportionment of these expenses for which it is difficult to find out any other basis of apportionment. An assessment of the equitable proportion is carried out by technical experts. This is used for distributing works manager salary, internal transport, steam water etc. when these are used for processes.

Download Files

ch13sm.pdf (0.07 MB )