What is the Department Allocation of Costs?

The department allocation approach is similar to the plant-wide approach except that cost pools are formed for each department rather than for the entire plant, and a separate predetermined overhead rate is established for each department. 

Remember, total estimated overhead costs will not change. Instead, they will be broken out into various department cost pools. 

This approach allows for the use of different allocation bases for different departments depending on what drives overhead costs for each department.

For example, if  overhead costs are driven more by the use of machinery than by labor in a given department, the department might use machine hours as the allocation base. If overhead costs are driven more by labor activity than by machine use, the department might use labor hours or labor costs as the allocation base.

Thus two rates are used to allocate overhead (rounded to the nearest dollar)

The department allocation approach allows cost pools to be formed for each department and provides for flexibility in the selection of an allocation base. 

Organizations that use this approach tend to have simple operations within each department but different activities across departments. 

Related Topics

• Job Costing vs Process Costing
• Assign Direct Material and Direct Labor to Job
• Assign Manufacturing Overhead Costs to Job
• Assign Overhead Costs to Products
• Plantwide Cost Allocation
• Department Cost Allocation
• Activity-Based Costing
• Weighted-Average Cost of Products
• Production Cost Report
• Fixed, Variable, and Mixed Cost Estimations
• Contribution Margin Income Statement
• Cost-Volume-Profit Analysis
• Margin of Safety
• Contribution Margin per Unit of Constraint
• Absorption Costing vs Variable Costing
• Differential Analysis and Decisions
• Cost Decisions for Joint Products
• Capital Budgeting
• Life Cycle Costing
• The Master Budget
• Activity-Based Budgeting
• Standard Costs
• Imputed Value
• Variance Analysis for Product Costs
• Absorption Pricing
• Price Variance
• Absorption Variance 
• Responsibility Centers
• Comparing Segmented Income
• Using ROI to Evaluate Performance
• Using Residual Income to Evaluate Performance
• Use Economic Value Added to Evaluate Performance
• Transfer Pricing