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.