Departmentalization of factory overhead means dividing the plant into parts or sections called departments or cost centers to which expenses are charged. From an accounting point of view, dividing the plant into separate segments according to some logical form provides more accurate results and better control.
Jobs and products can be more accurately costed because each department will be charged overhead rates that are reasonable for that department. A job or product that passes through different departments will be charged at those departments’ default rates, not a single plant-wide overhead rate. The indirect cost will be charged, depending on the type and number of departments through which a product passes, and in this way it will be easy to calculate the cost of a product at any stage that may be the requirement of the organization. .
Because overhead cost records are available by department, it’s easy to track them and find out the reason(s) for any variance.
There are two main types or classes of departments. One is the production department that is engaged in the actual manufacturing of the products by changing the shape, form, or nature of the materials worked, or simply assembling the parts into a finished product. Some examples of production departments are spinning departments, weaving departments, finishing departments, cutting departments, etc. The other is the service department which does not produce anything but indirectly helps production by providing services to other departments. Some examples of service departments are repair department, purchasing departments, storage departments, cafeteria, inspection, etc.
The number and type of departments a manufacturing company will be divided into depends largely on the nature of its business, size and requirements. A small manufacturing company may have only one department and a large company may have many departments. But the number of departments should be such that it helps the smooth running of all operations rather than being a cause of bureaucracy.
There are no hard and fast rules for setting up apartments. The most common approach is to divide the factory into functional activity lines or groups of activities that constitute a department. For proper control of factory overhead and accuracy in calculating production costs, the division of the factory into separate, interrelated, and independently governed units is required. Due weight should be given to the following factors in deciding the types of departments necessary to establish accurate departmental overhead rates for the purpose of cost control: (a) Similarity in nature of work and machinery; (b) Responsibilities for billing and costs; (c) Location of operating activities and machinery; (d) Relationship of manufacturing activities to product flow; (e) Number of departments or cost centers required.
