How Is Overhead Cost Charged To Departments

Responsibility for Manufacturing Overhead Cost: As the preceding overhead cost topic indicate, many overhead items are directly chargeable to a given department and become the direct responsibility of the departmental supervisor. Allocated or distributed overhead cost causes problems in assigning cost responsibility. To calculate a departmental factory overhead rate, these costs must be allocated so that all costs can be charged to the job or product.

The allocation procedure is not necessary for cost control; that is, for responsibility accounting. If allocated overhead cost charges are to be shown on the report furnished to the supervisor, they should be limited to those expenses for which he has assumed control and responsibility.

The procedure depends a great deal upon the methods of cost accumulation and allocation employed by a firm. Certain expenses (e.g., electricity) could, when metered for a department, be considered a direct departmental overhead.

When these expenses together with others are collected first in an account or in a department such as General Factory or Utilities, the allocation takes place on a prior established basis. Differences between actual and allocated or charged-out costs in these accounts or departments should not be shown on the reports for the departments served ; rather the control or responsibility phase stays with the originating department.

The ‘Billing” or “Sold-Hour” Rate of a Service Department: The cost system provides for a normal volume distribution of service hours, use hours, and/or maintenance hours to producing or other service departments. The distribution can be looked upon as a purchase by the recipient center or a sale by the servicing center.

The distribution to the recipient center is based on what is termed a “billing rate,” a “sold-hour rate,” a “charging rate,” or a “transfer rate.”

The method is based on the idea that these departments or centers purchase the services in the same manner as direct materials and direct labor. For these cost elements, quantities and cost are controlled and differences noted. The producing or service department foreman is responsible for the number of hours worked, or kw-hours purchased, and the cost incurred in his department.