The departmentalization of factory overheads means dividing the plant into parts or sections called departments or cost centers to which the expenses are charged. From an accounting point of view, dividing the plant into separate segments in some logical way provides more accurate results and better control.
More accurate costing of jobs and products is possible because each department will be charged general rates that are reasonable for that department. A job or product that passes through different departments will be charged at the default rates for those departments, not a plant-wide overhead rate. Overhead, depending on the type and number of departments through which a product passes, will be charged, and in this way it will be a simple job to calculate the cost of a product at any stage that may be the organization’s requirement. .
Since overhead cost records are available in the department, it is easy to monitor 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 dedicated to the actual manufacture of the products by changing the shape, shape or nature of the materials being worked on, or simply assembling the pieces 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 that does not produce anything, but indirectly helps in production by providing services to other departments. Some examples of service departments are the repair department, purchasing departments, warehousing departments, cafeteria, inspection, etc.
The number and type of departments a manufacturing company will be divided into depends largely on the nature of your business, size, and requirements. A small size of a manufacturing company may have only one department and a big concern may have many departments. But the number of departments should be such that it contributes to the smooth running of all operations rather than being a cause of paperwork.
There are no hard and fast rules for the establishment of departments. The most common approach is to divide the factory into functional activity lines or activity groups that make up a department. For proper control of factory overheads and precision in the calculation of production costs, the division of the factory into separate, interrelated and independently governed units is required. The following factors should be of due importance in deciding the types of departments necessary to establish precise departmental overhead rates for the purpose of controlling costs: (a) Similarity in nature of work and machinery; (b) Responsibilities for turnover 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.
