Definition: Departmental contribution to overhead is the amount of money a single department has available after its direct expenses are paid to help pay for the overhead of the business. Departmental contribution to overhead is calculated by subtracting direct expenses from the department’s revenues. This calculation assumes that all indirect expenses are considered overhead.
What Does Departmental Contribution to Overhead Mean?
In a large company that has many departments overhead expenses are often shared among the departments. Since all departments generally benefit from overhead expenses like utilities, rent, taxes, and insurance, it only makes sense that each department should have to contribute to help pay for the overhead costs.
Every department is different. Some departments use larger portions of overhead costs. Take a manufacturer for instance. The manufacturing department will use much more electricity than the office or accounting department. Most companies allocate overhead costs on a usage basis, but the allocation should also take into consideration the departmental contribution to overhead.
Some departments can’t afford to contribute to the overhead costs because their revenues only cover their direct expenses. If they were required to pay overhead costs, they would realize a loss.
Managers can use the departmental contribution to overhead report to evaluate how efficiently a department is running and whether or not the business can afford to keep the department operating.