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  Departmentalisation of Overheads

Introduction to Departmentalisation of Overheads

After collecting and categorizing overheads within suitable account headings the next step included overhead distribution is the departmentalisation of these overheads to different cost centres on an appropriate basis. This includes two stages

(a) Allocation of overheads: The process of charging the full amount of overhead costs to a specific cost centre is known as Allocation. This is feasible while the nature of expenses is such that it can be simply identified with a particular cost centre. For instance, the salary paid to a foreman of a specific production department can be directly recognized with that department and so it will be directly charged to that department.

(b) Apportionment of overheads: It is the technique of dividing up an item of overhead cost and charging it to the cost centres on an equitable basis. This is completed in case of those overhead items that cannot be fully allocated to a particular department. For instance, the salary paid to the works manager of the factory cannot be charged fully to a particular production department but must be charged to all departments of the factory on an equitable basis.

Though, in common parlance no such type of distinction is observed. The basis of apportionment and the explanation of apportionment are referred to in the card maintained for each Standing Order/ Cost Account Number. For instance, rent of the factory will be apportioned over several departments of the factory as per to the area occupied through each department. The amount of rent that each department has to bear will be referred to in the standing order number card allotted to rent. Similar is true for other items.

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