Why departmentalization is a must for cost planning and control?

The responsible control of departmental expenses is equally essential in other than manufacturing activities. The following have or should have divided their large complex entities into administrative and supervisory departments, sections, or service units for cost planning and control.

Non-manufacturing segments of manufacturing concerns (e.g., marketing departments)
Retail or department stores
Financial institutions (banks, savings and loan associations, and brokerage houses)

Insurance companies
Educational institutions (public school systems, colleges, and universities)
Service organizations (hotels, motels,hospitals, and nursing homes)
Federal, state, and municipal governments (and their agencies)

Retail or department stores have practiced departmentalization for many years for cost planning and control by grouping their organizations under the following typical headings: administration, occupancy, sales promotion and advertising, purchasing, selling, and delivery. These groups receive costs similar to those in manufacturing businesses. The group “Occupancy” is almost identical with General Factory, for expenses like building repairs, rent and taxes, insurance on buildings and fixtures, light, heat, power, and depreciation on buildings and fixtures are collected in this group. Again, similar to factory procedures, group costs are prorated to revenue-producing sales departments via a charging or billing rate.

Financial institutions (banks, savings and loan associations, and brokerage houses) should departmentalize their organizations in the light of cost planning and control in order to control expenses and establish a profitability rating of individual activities. The size of the institution and the types of services offered will lead to different numbers of departments. The accumulation of departmental costs again follows factory procedure: (1) direct expenses, such as salaries, supplies, and depreciation of equipment are charged directly ; (2) general expenses, such as light, heat, and air conditioning are prorated to the departments on appropriate bases. As income and expenses are ascertained, it is possible to create a work cost unit that permits the charging of accounts for services rendered and the analysis of an account’s profitability.

The work of insurance companies is facilitated by dividing the office into departments for cost planning and control. Some departments have several hundred clerks, and the work is highly organized. Insurance companies were almost the first businesses to install large-scale digital computers to (1) reduce the clerical costs connected with the insurance business and (2) calculate new insurance rates and coverage on a more expanded basis for greater profitability. This quite detailed departmentalization might include actuarial, premium collection, group insurance, policyholders’ service, registrar, medical, legal, etc. While some costs are unique to the individual group, most are identical with expenses experienced in any office department. Thus, departmentalization seems the must for cost planning and control.

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