Accounting for Factory

Overhead Departmentalization
Direct Departmental Costs
 Factory overhead costs that are directly traceable to a specific department.
Dire ct De p artm e n ta l co s ts Ba s is of Dire ct Ch a rg e
Su pervision
In direct labor Payroll
Overtime p remiu m
Sick leaves
Vacation leaves Vou cher
Pension an d other labor frin ge ben efits
SSS, Med icare, Pag-IBIG and Emp loyee’s Payroll, sched u le of con tribu tion s, earn in g
Comp ensation Con tribu tion records
In direct materials
Stores requ isition or Vou cher
Factory su p plies
Bills (or in ter-dep artment billing) or
Rep airs an d Mainten ance
Acknowled gement of services rend ered
Depreciation – Mach in ery an d Equ ip ment In ventory list of mach in ery an d equ ipmen t*
*Treated as indirect departmental expenses when the company does not maintain the given bases of direct charges
by departments.
 Indirect Departmental
 These are costs do not originate with any specific department. They are incurred for

Costs
the benefit of all departments, so their costs are allocated among all departments.

In d ire ct De p a rtm e n ta l Co s ts Allo ca tio n Bas e s

Bu ild in g Ren t Squ are footage / Area of space occu p ied
Prop erty Tax Squ are footage / Area of space occu p ied
Dep reciation -Bu ild in g Squ are footage / Area of space occu p ied
Fire In su ran ce Squ are footage / Area of space occu p ied
Bu ildin g rep airs Squ are footage / Area of space occu p ied
Gas Utility Squ are footage / Area of space occu p ied
Su perin ten d en ce Number of emp loyees
Telep h one and telegraph Number of emp loyees or Nu mber of telep h on es
Worker’s comp en sation Departmen t p ayroll
Fixed p ortion of electricity Squ are footage
Variable p ortion of electricity Kilowatt h ou rs
Illustration:
Chemical X Company operates with three producing departments – Blending, Testing, and Terminal. The overhead items and
amounts for the period, along with the bases for their allocation, are listed below.
Ite m Am ou n t Allo cation Ba s is
Building dep reciation 24,000.00 Square footage
In suran ce 33,000.00 Square footage
Property Tax 48,000.00 Square footage
Teleph one 126,000.00 Nu mber of emp loyees
Power 75,000.00 Horsepower of equipment
Other relevant data are:
Blend in g Testin g Termin al
TOTAL
departmen t Departmen t Dep artment
No. of emp loyees 25 40 19 84
Direct labor hou rs 62,000.00 104,000.00 54,000.00 220,000.00
Horsepower of equ ip men t 60,000.00 15,000.00 5,000.00 80,000.00
Kilowatt hours 4,000.00 1,000.00 6,000.00 11,000.00
Squ are footage 2,000.00 2,000.00 2,000.00 6,000.00
Directly chargeable overh ead cost $125,000.00 $75,000.00 $87,500.00 $287,500.00
Direct materials $75,000.00 $25,000.00 ---- $100,000.00

Required: Prepare the overhead distribution for each producing department, including the detail for each item of allocation
overhead.
 Blending Testin g Termin al
TOTAL
Ite m Am ou n t Alloca tion Bas is department Department Departmen t
Bu ilding d epreciation 24,000.00 Squ are footage No. of employees 25 40 19 84
Insu ran ce 33,000.00 Squ are footage Direct labor h ou rs 62,000.00 104,000.00 54,000.00 220,000.00
Property Tax 48,000.00 Squ are footage Horsepower of equ ipment 60,000.00 15,000.00 5,000.00 80,000.00
Kilowatt h ours 4,000.00 1,000.00 6,000.00 11,000.00
Telep hone 126,000.00 Number of emp loyees
Squ are footage 2,000.00 2,000.00 2,000.00 6,000.00
Power 75,000.00 Horsepower of equipmen t
Directly chargeable overh ead cost $125,000.00 $75,000.00 $87,500.00 $287,500.00
Direct materials $75,000.00 $25,000.00 ---- $100,000.00

Solution:
Ble n d in g Te s tin g Te rmin al
De p a rtme n t De p artm e n t De p a rtme n t
Directly chargeable cost 125,000.00 75,000.00 87,500.00
In direct chargeable costs:
Building Depreciation 24,000*(2000/ 6000) 8,000.00 8,000.00 8,000.00
In suran ce 33,000*(2000/ 6000) 11,000.00 11,000.00 11,000.00
Property Tax 48,000*(2000/ 6000 16,000.00 16,000.00 16,000.00
Teleph one 126,000*(25/ 84) 37,500.00
126,000*(40/ 84) 60,000.00
126,000*(19/ 84) 28,500.00
Power 75,000*(60000/ 80000) 56,250.00
75,000*(15000/ 80000) 14,603.00
75,000*(5000/ 80000) 4,688.00
TOTAL OVERHEAD 253 ,750 .00 1 84,603 .00 155 ,688 .00
Establishing Departmental Overhead Rates
The establishment of departmental overhead rates involves the following steps:

1. Estimate total departmental overhead of producing and service departments at the expected activity
level; determine, if possible, the fixed and variable natures of each cost category.
2. Prepare a survey (with measurements of all allocation bases) for the purpose of distributing indirect
departmental overhead and service department costs.
3. Estimate total indirect departmental overhead (such as electric power, fuel, water, building-
depreciation, property tax, and fire insurance) at the selected activity level and allocate these costs
among departments.
4. Distribute service department costs to benefiting departments.
5. Calculate departmental overhead rates.
 DeWitt Produ cts
Estimated Departmental Factory Overhead
For the Year 20xx

Prod ucing Dep artments Service Dep artmen ts

Materials General
Cos t Accou n t F or V Total Cuttin g Plan ning Assembly Up holstery Han dling Insp ection Utilities Factory

Illustration
Direct departmental costs:
Sup ervisors F $70,000 $9,000 $8,000 $8,000 $8,000 $10,000 $6,000 $9,000 $12,000
In direct Labor F 9,000 1,000 2,000 1,000 1,500 1,000 500 1,000 1,000
V 66,000 9,000 3,000 5,000 5,500 11,000 8,500 10,000 14,000

:
Labor frin ge ben efits F 10,000 1,500 1,000 1,000 1,000 2,000 1,000 1,500 1,000
V 47,000 10,500 11,800 9,400 8,200 1,800 1,400 1,900 2,000
In direct materials F 4,000 500 500 800 1,200 300 200 200 300
V 19,000 2,500 2,500 3,200 4,800 1,700 800 1,800 1,700
Rep airs and main tenance F 3,000 600 500 700 600 300 300
V 9,000 1,400 1,500 1,300 1,800 500 200 1,700 600
Dep reciation-equ ip ment F 13,000 1,500 3,500 1,000 3,000 4,000
Total d ire ct d e p a rtm e n tal cos ts $250,000 $37,500 $34,300 $31,400 $35,600 $28,300 $18,600 $27,400 $36,900
In d irect dep artmen tal cost:
Electric p ower F $2,000 $2,000
V 20,000 20,000
Fuel F 1,000 1,000
V 10,000 10,000
Water F 1,000 1,000
V 4,000 4,000
Dep reciation-buildings F 5,000 $1,250 $1,000 $1,500 $1,250
Prop erty tax F 4,000 1,000 800 1,200 1,000
In surance (life) F 3,000 750 600 900 750
Total in d ire ct d e p a rtm e n ta l co s t $50,000 $3,000 $2,400 $3,600 $3,000 $38,000
Total d ep artmental factory overhead $300,000 $40,500 $36,700 $35,000 $38,600 $28,300 $18,600 $65,400 $36,900
Total fixed factory overh ead $125,000 $17,100 $17,900 $16,100 $18,300 $13,300 $7,700 $16,000 $18,600
Total variable factory overhead $175,000 $23,400 $18,800 $18,900 $20,300 $15,000 $10,900 $49,400 $18,300
 DeWitt Products
Step 1: Estimate total departmental Estimated Dep artmental Factory Overhead
overhead of producing and service For the Year 20xx

departments at the expected activity

Produ cin g Departmen ts Service Departments
level; determine, if possible, the Materials General
fixed and variable natures of each Co s t Acco u n t F or V Total Cu ttin g Plann ing Assembly Uph olstery Handlin g Inspection Utilities Factory
cost category. Direct d ep artmen tal costs:
Su pervisors F $70,000 $9,000 $8,000 $8,000 $8,000 $10,000 $6,000 $9,000 $12,000
Ind irect Labor F 9,000 1,000 2,000 1,000 1,500 1,000 500 1,000 1,000
V 66,000 9,000 3,000 5,000 5,500 11,000 8,500 10,000 14,000
Labor fringe benefits F 10,000 1,500 1,000 1,000 1,000 2,000 1,000 1,500 1,000

Estimating Direct Ind irect materials

V
F
47,000 10,500
4,000 500
11,800
500
9,400
800
8,200
1,200
1,800
300
1,400
200
1,900
200
2,000
300

Departmental Costs Repairs an d maintenan ce

V
F
19,000
3,000
2,500
600
2,500
500
3,200
700
4,800
600
1,700 800 1,800
300
1,700
300
V 9,000 1,400 1,500 1,300 1,800 500 200 1,700 600
Depreciation -equipmen t F 13,000 1,500 3,500 1,000 3,000 4,000
To ta l d ire ct d e p artm e n ta l cos ts $250,000 $37,500 $34,300 $31,400 $35,600 $28,300 $18,600 $27,400 $36,900
Arrived at projections based Ind irect departmental cost:
on historical figures and in Electric power F $2,000 $2,000
consultation with the head of V 20,000 20,000
each department Fu el F 1,000 1,000
V 10,000 10,000
Water F 1,000 1,000
V 4,000 4,000
Depreciation -bu ild ings F 5,000 $1,250 $1,000 $1,500 $1,250
Property tax F 4,000 1,000 800 1,200 1,000
Insuran ce (life) F 3,000 750 600 900 750
To ta l in d ire ct d e p a rtm e n tal co s t $50,000 $3,000 $2,400 $3,600 $3,000 $38,000
Total departmental factory overhead $300,000 $40,500 $36,700 $35,000 $38,600 $28,300 $18,600 $65,400 $36,900
Total fixed factory overhead $125,000 $17,100 $17,900 $16,100 $18,300 $13,300 $7,700 $16,000 $18,600
Total variable factory overhead $175,000 $23,400 $18,800 $18,900 $20,300 $15,000 $10,900 $49,400 $18,300
Step 2: Prepare a survey (with measurements of all allocation bases) for the purpose of distributing indirect
departmental overhead and service department costs.

Factory Survey To allocate indirect departmental costs and service department costs to the benefiting
departments, the necessary data are obtained from a survey of facilities records or factory
survey.

DeWitt Products
Factory Su rvey at Begin ning of Year

Prod ucing No. of Kilo-watt Horsepower Floor Cost of Materials

Department emp loyees % Hou rs % Hours % Area % Requ isitioned %
Cu tting 8.0 20 12,800 20 200,000 40 5,250 25 $180,000 45
Plan ting 6.8 17 6,400 10 120,000 24 4,200 20 40,000 10
Assembly 12.0 30 19,200 30 80,000 16 6,300 30 40,000 10
Upholstery 13.2 33 25,600 40 100,000 20 5,250 25 140,000 35
TOTAL 40.0 100 64,000 100 500,000 100 21,000 100 $400,000 100
 DeWitt Produ cts
Factory Survey at Beginnin g of Year
Prop
Depreciation-building:
Life Insurance:
erty tax:

Estimating and Allocating

Producin g No. of Kilo-watt Horsep ower Floor Cost of Materials
Cu
Cuttin
ttingg 4,000*(5,250/
3,000*(5,250/
5,000*(5,250/ 21,000)
21,000) == 1,000
750
1,250 Dep artmen t employees % Hou rs % Hours % Area % Requ isitioned %
Planning
Plan ning 4,000*(4,200/
3,000*(4,200/
5,000*(4,200/ 21,000)
21,000) == 800
600
1,000 Cutting 8.0 20 12,800 20 200,000 40 5,250 25 $180,000 45

Indirect Departmental
Plantin g 6.8 17 6,400 10 120,000 24 4,200 20 40,000 10
Assembly 4,000*(6,300/
3,000*(6,300/
5,000*(6,300/ 21,000)
21,000) == 1,200
900
1,500 Assembly 12.0 30 19,200 30 80,000 16 6,300 30 40,000 10
Uph
Upholstery
olstery 4,000*(5,250/
3,000*(5,250/
5,000*(5,250/ 21,000)
21,000) == 1,000
750
1,250 Up holstery 13.2 33 25,600 40 100,000 20 5,250 25 140,000 35

Costs TOTAL 40.0 100 64,000 100 500,000 100 21,000 100 $400,000 100

DeWitt Produ cts

Step 3: Estimate total Estimated Dep artmen tal Factory Overh ead
indirect departmental For the Year 20xx
overhead (such as
electric power, fuel,
water, building- Prod u cing Dep artmen ts Service Departmen ts
depreciation, property Materials General
tax, and fire insurance) Co s t Accou n t F or V Total Cu ttin g Plan nin g Assembly Up h olstery Hand lin g In sp ection Utilities Factory
at the selected activity
In d irect d ep artmen tal cost:
level and allocate these
costs among Electric power F $2,000 $2,000
departments. V 20,000 20,000
Fu el F 1,000 1,000
V 10,000 10,000
Water F 1,000 1,000
V 4,000 4,000
Depreciation -bu ild in gs F 5,000 $1,250 $1,000 $1,500 $1,250
Prop erty tax F 4,000 1,000 800 1,200 1,000
In su rance (life) F 3,000 750 600 900 750
To ta l in d ire ct d e p a rtm e n ta l co s t $50,000 $3,000 $2,400 $3,600 $3,000 $38,000
 DeWitt Products
Distribution of Estimated Service Department Costs
and Calculation of Deparmental Overhead Rates
For the Year 20xx

Producing Departments Service Departments

Materials General
Cost Account Total Cutting Plannin g Assembly Upholstery Handling Inspection Utilities Factory
Total departmental factory overhead
before distribution of service dept. $300,000 $40,500 $36,700 $35,000 $38,600 $28,300 $18,600 $65,400 $36,900
Distribution of Distribu tion of service departments:
Materials handling 12,735 2,830 2,830 9,905 (28,300)
Estimated Service (Base: estimated cost of materials
requisitioned)
Department Costs Inspection
(Base: equally to assembly 9,300 9,300 (18,600)
and Calculation of and upholstery dept.)

Departmental Utilities
(Bases: 20% on kwh 2,616 1,308 3,924 5,232 (13,080)

Overhead Rates (Bases: 50% on hph 13,080 7,848 5,232 6,540 (32,700)
(Bases: 30% on floor area 4,905 3,924 5,886 4,905 (19,620)
General Factory 7,380 6,273 11,070 12,177 (36,900)
(Base: number of employees)
Total service dep artmental cost distributed $300,000 $81,216 $58,883 $73,242 $86,659
Total departmen tal FOH after distribution
Bases:
Direct labor hours 20,304 24,070
Machine hours 9,200
Direct labo cost $122,000
RATES $4.00 $6.40 60% $3.60
per DLH per MH of DLC per DLH
 DeWitt Produ cts
Estimated Departmental Factory Overh ead
For th e Year 20xx

Prod ucin g Dep artments Service Departmen ts

Materials General
Cos t Accou n t F or V Total Cuttin g Planning Assembly Up holstery Han dling Inspection Utilities Factory
Direct d epartmental costs:
Sup ervisors F $70,000 $9,000 $8,000 $8,000 $8,000 $10,000 $6,000 $9,000 $12,000
Ind irect Labor F 9,000 1,000 2,000 1,000 1,500 1,000 500 1,000 1,000
V 66,000 9,000 3,000 5,000 5,500 11,000 8,500 10,000 14,000
Labor fringe ben efits F 10,000 1,500 1,000 1,000 1,000 2,000 1,000 1,500 1,000
V 47,000 10,500 11,800 9,400 8,200 1,800 1,400 1,900 2,000
Ind irect materials F 4,000 500 500 800 1,200 300 200 200 300
V 19,000 2,500 2,500 3,200 4,800 1,700 800 1,800 1,700
Rep airs and maintenance F 3,000 600 500 700 600 300 300
V 9,000 1,400 1,500 1,300 1,800 500 200 1,700 600
Depreciation-equ ip ment F 13,000 1,500 3,500 1,000 3,000 4,000
Total d ire ct d e p a rtme n tal co s ts $250,000 $37,500 $34,300 $31,400 $35,600 $28,300 $18,600 $27,400 $36,900
Indirect departmen tal cost:
Electric power F $2,000 $2,000
V 20,000 20,000
Fuel F 1,000 1,000
V 10,000 10,000
Water F 1,000 1,000
V 4,000 4,000
Depreciation-bu ildings F 5,000 $1,250 $1,000 $1,500 $1,250
Property tax F 4,000 1,000 800 1,200 1,000
Insurance (life) F 3,000 750 600 900 750
Total in d ire ct d e p a rtm e n ta l co s t $50,000 $3,000 $2,400 $3,600 $3,000 $38,000
Total d epartmen tal factory overhead $300,000 $40,500 $36,700 $35,000 $38,600 $28,300 $18,600 $65,400 $36,900
Total fixed factory overh ead $125,000 $17,100 $17,900 $16,100 $18,300 $13,300 $7,700 $16,000 $18,600
Total variable factory overhead $175,000 $23,400 $18,800 $18,900 $20,300 $15,000 $10,900 $49,400 $18,300
 DeWitt Produ cts
Factory Survey at Begin n in g of Year DeWitt Produ cts
Distribution of Estimated Service Department Costs
Produ cing No. of Kilo-watt Horsepower Floor Cost of Materials an d Calculation of Deparmental Overhead Rates
Dep artment employees % Hours % Hou rs % Area % Requ isition ed %
For the Year 20xx
Cuttin g 8.0 20 12,800 20 200,000 40 5,250 25 $180,000 45
Plan tin g 6.8 17 6,400 10 120,000 24 4,200 20 40,000 10
Assembly 12.0 30 19,200 30 80,000 16 6,300 30 40,000 10 Producing Departments Service Departments
Uph olstery 13.2 33 25,600 40 100,000 20 5,250 25 140,000 35 Materials General
TOTAL 40.0 100 64,000 100 500,000 100 21,000
Cost Account 100 $400,000 100 Total Cutting Planning Assembly Uph olstery Handling Inspection Utilities Factory
Total departmental factory overhead
before distribution of service dept. $300,000 $40,500 $36,700 $35,000 $38,600 $28,300 $18,600 $65,400 $36,900
Distribution of Distribution of service departments:
Materials handling 12,735 2,830 2,830 9,905 (28,300)
Estimated Service (Base: estimated cost of materials
requisitioned)
Department Costs Inspection
(Base: equally to assembly 9,300 9,300 (18,600)
and Calculation of and upholstery dept.)

Departmental Utilities
(Bases: 20% on kwh 2,616 1,308 3,924 5,232 (13,080)

Overhead Rates (Bases: 50% on hph

(Bases: 30% on floor area
13,080
4,905
7,848
3,924
5,232
5,886
6,540
4,905
(32,700)
(19,620)
General Factory 7,380 6,273 11,070 12,177 (36,900)
General
Utilities:
Utilities:
Materials Factory:
65,400
65,400 xx 30%
Han dlin 50%
g: floor
20% h ph =area
kwh 32,700
= 19,620
13,080
(Base: number of employees)
Cu
Cuttin
Cu ttin
Cutting
ttinggg 36,900*(8/ 40) 21,000)
19,620*(5250/
32,700*(200k/
13,080*(12,800/
28,300*(180k/ = 7,380
500k)
400k)
64k) ===13,080
4,905
12,735
2,616
Total service dep artmental cost distributed $300,000 $81,216 $58,883 $73,242 $86,659
Planning
Plann
Plannin
Plan ning 36,900*(6.8/
28,300*(40k/40)
ingg 19,620*(4200/
32,700*(120k/
13,080*(6,400/ = 6,273
21,000)
500k)
400k)
64k) ===2,830
=7,848
3,924
1,308
Total departmental FOH after distribution
Assembly
Assembly 36,900*(12/
28,300*(40k/40)
Assembly 19,620*(6300/
32,700*(80k/ =64k)
500k)
13,080*(19,200/ 11,070
21,000)
400k) = =5,232
=3,924
5,886
2,830 Bases:
Upholstery
Up
Upholstery
Uphholstery 36,900*(13.2/
28,300*(140k/40)
olstery 19,620*(5250/
32,700*(100k/
13,080*(25,600/ = 12,177
21,000)
500k)
400k)
64k) ===6,540
4,905
9,905
5,232 Direct labor hours 20,304 24,070
Machine hours 9,200
Direct labo cost $122,000
RATES $4.00 $6.40 60% $3.60
per DLH per MH of DLC p er DLH
Using Departmental Overhead Rates
Assume that the applied factory overhead of the four producing departments are as follows:

Work in Process 84,020

App lied factory overhead - Cu ttin g Department 84,020
(21,005 actu al d irect labor h ours x 4)

Work in Process 54,400

App lied factory overhead - Plan n ing Dep artmen t 54,400
(8,500 actu al mach ine h ou rs x 6.40)

Work in Process 67,020

App lied factory overhead - Assembly Departmen t 67,020
(111,700 actu al d irect labor cost x 60%)

Work in Process 79,560

App lied factory overhead - Up h olstery Dep artmen t 79,560
(22,000 actu al direct labor h ours x 3.60)
Allocating Service Department Cost
Service department’s cost such as costs of procurement and receiving departments are reallocated to the
producing departments since these costs cannot be directly identified to the products manufactured.

Se rvice De p a rtm e n ts Allo catio n Bas e s

Procu remen t Nu mber of orders/ Cost of materials
Cost of materials; nu mber of u n its; nu mber of
Receivin g
orders
Cost of materials; n u mber of requ isitions filled ;
Storeroom
n umber of u nits h an dled
Factory office Number of emp loyees; labor h ours; labor costs
Personn el Number of emp loyees; labor h ours; labor costs
Bu ild in g main ten an ce Floor space occu p ied / Squ are footage
Power p lan t Kilowatt h ours of p ower u sage
Thank You!