Allocating services department cost to producing departments

ALLOCATION OF SERVICES DEPARTMENT OVERHEAD TO BENEFITING DEPARTMENTS: The expenses of services department must ultimately be transferred to producing departments to establish predetermined factory overhead rates and to analyze variances. Effective expense control dictates that each services department costs be first charged with its direct overhead. Services department (s) may also be charged with general factory expenses as well as with costs from other service departments. Most of the overhead items discussed for producing departments will naturally also be found in services department (s).

The number and types of services department (s) in a company depend on its operations and the degree of expense control desired. Services department (s) used for illustrative purposes are: (1) materials handling, (2) inspection, (3) utilities, and (4) general plant services.

Materials Handling. Materials handling involves the operation of cranes, trucks, fork lifts, loaders, etc. Since many departments are served by this function, a preferred method of organization establishes a separate service department for materials handling activities. All handling costs are charged to this department, and a foreman is made responsible for their control. Costs charged to such a services department are the same as those charged to any department and include wages and labor fringe costs of crane and truck operators; supplies, such as batteries, gasoline, etc.; and repairs and maintenance of the equipment.

In addition to centralizing responsibility for materials handling operations, departmentalization has the advantage of collecting all materials handling costs in one place thus permitting quick measurement of results and reduction of costs through modern materials handling techniques and equipment, changes in routing or production, etc. Allocation of services department (s) costs are discussed in other blog posts. For more information, please search the topic.