Chapter 7

Departmentalizing
Overhead Costs

McGraw-Hill/Irwin

Copyright 2007 by The McGraw-Hill Companies, Inc. All rights

Introduction
While the cost of direct material and labor
are charged to specific job, all other costs
are charged to manufacturing overhead.

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Types of Manufacturing
Overhead costs
Some of the common overhead costs in a
factory operation include:
Indirect material
Example: shop supplies, cleaning supplies

Indirect labor
Example: factory line supervisors, janitors

Other manufacturing overhead

Example: employee fringe benefits, payroll taxes,
depreciation, insurance

7-3

Control of Manufacturing
Overhead Costs
The method used to record manufacturing
overhead cost depends on:
Size of the company
How it is organized
Types of products manufactured

Account in use: Manufacturing Overhead

Control account in the general ledger

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Departmentalization of
Overhead
Separate control accounts
Maintain a control account for each different
manufacturing overhead cost

Single control accounts

Subsidiary ledger by type of cost
Subsidiary ledger by department

7-5

Recording Overhead Costs

Voucher register entries
Invoice comparison with purchase order
Preparation of voucher including a notation of
department to be charged
Distribution memorandum indicates how the cost is
to be distributed

Enter into voucher register upon approval

Charge the cost to the appropriate
departmental overhead analysis sheet

7-6

Recording Overhead Costs

(contd)
General journal vouchers
Most manufacturing overhead costs include
fixed costs
Involves the preparation of a schedule of
monthly fixed overhead costs
The schedule is attached to the journal voucher
and posted to departmental overhead analysis
sheet.

7-7

Summary Schedule of
Departmental Costs
Schedule shows the total amount of each
type of cost incurred in each department
Prepared at the end of each month
Subsidiary ledger should agree with its related
control account

7-8

Allocating Overhead to Jobs

Overhead cost must be associated with
products or jobs
This ensures that the transfer will parallel the
work flow
First step distributing overhead costs to
departments

7-9

Distributing Service Department

Costs
Service department costs must be
redistributed to where goods are produced
Costs should be distributed in proportion
to services provided

7-10

Distributing Service Department

Costs (contd)
Order of Allocation
Distribute first the costs of the service department
that serves the greatest number of other
departments, then distribute for the second highest
and so on
If there is no single department performing this
task, apportion cost based on the largest
expenditure first
Once costs for a department have been
apportioned, no further costs are prorated to it
Another method is to apportion costs only to
producing departments
7-11

Distributing Service Department

Costs (contd)
Basis for allocation - Costs are redistributed
by ratios that relate the service provided and
some functional basis
Allocating building service department costs based
on floor space occupied by each department
Allocating general factory department costs based
on the total direct labor cost in the producing
department

7-12

Recording Overhead
Distribution in the General
Ledger
At the end of the month the distribution of
overhead costs is entered in the general
ledger
Manufacturing overhead control is closed into
separate departmental overhead accounts
Distribution of service department costs are
journalized in the order of allocation
7-13

Flow of Entries to Record Distribution of

Overhead Costs

7-14