What is a Departmental Rate?

A departmental rate is the overhead rate per unit of activity that is charged by an individual department. The reason for doing so is to allocate a department’s indirect costs (such as its compensation, rent, and utilities). The departmental rate is only charged by production departments. There is no departmental rate for administrative departments, since costs in those departments are charged to expense as incurred.

A more common overhead allocation method is to compile all factory overhead costs into a single cost pool, which is then allocated to produced units. The use of departmental rates is a more refined way to allocate factory overhead costs, since allocations are based on the amount of resources consumed by produced units within each department.

Example of a Departmental Rate

A machine shop provides machining services to other departments within Striation Corporation. To calculate the rate, the company’s accountant divides the department’s total expenses (including labor, depreciation, utilities and supplies) of $500,000 and divides this total by the total annual machine shop hours (which total 10,000 hours). The result is a departmental rate of $50/hour.

If another department were to use 100 hours of the machine shop’s services, it would be charged $5,000, which is the $50/hour departmental rate multiplied by 100 hours. This allocation approximates the machine shop resources that were used.