For example, the whole of overtime wages paid to the workers relating to a particular department should be charged to that department. Therefore, the common expenses have to be apportioned or distributed over the departments on some equitable basis.
So cost apportionment will arise in case of expenses common to more than one cost centre or unit. So, the term allocation means the allotment of the whole item without division to a particular department or cost centre. This is used for apportioning lighting expenses.
Allocation and apportionment are methods that are used to divide up costs among various cost centers depending on which department or cost center each cost or portions of each cost belong.
There are three methods for dealing with the distribution of inter-departmental services: Allocation involves charging overheads directly to specific departments production and service.
This basis is used for the apportionment of power expenses. The basis adopted should be such by which the expenses being apportioned must be measurable by the basis adopted and there must be proper correlation between the expenses and the basis.
The cost of lighting, when not metered, may similarly be apportioned on a survey of the number and wattage of light points and the hours of use in each cost centre. Cost allocation occurs when overheads and expenses are charged directly to the cost center.
For example, the cost of renting a factory where shirts are manufactured is classified as an indirect cost because it would be impossible to relate such costs to shirts only, if other clothes, such as dresses and suits were also made in the same factory.
This basis is adopted for the apportionment of certain expenses like lighting and heating, rent, rates, taxes, maintenance on building, air conditioning, fire precaution services etc. According to this method, overheads should be apportioned on the basis of the sales ability or income generating ability of respective departments.
This basis is used for the apportionment of power expenses. In that situation it is logical to give weight to inter-departmental services while distributing the expenses of service departments. In a manufacturing concern, there are three types of departments: These conditions are that the expense must have been caused by the cost center and the specific amount of the expense or overhead should be known.
This is because organisations must recover their fixed production overheads and they do this by absorbing a fixed amount into each product that they make and sell. Principles of Apportionment of Overhead Costs: Suitable bases have to be found out for apportioning the items of overhead cost to production and service departments and then for reapportionment of service departments costs to other service and production departments.
Under Trial and Error Method distribution will be made in the following way. This method is used only for those items of expenses which are booked with the amounts of wages, e. An expense which is directly identifiable with a specific cost centre is allocated to that centre.
According to this principle, the apportionment of overheads is made on the basis of the production targets. On the basis of the above survey the apportionment is made. Com Notes Cost Accounting Allocation and Apportionment of Overheads Allocation and Apportionment of Overheads Cost Accounting After classification of overheads all the items of overheads are collected properly under suitable account heading.
A department where actual process of manufacturing is carried on is called manufacturing or producing department.
Following factors must be taken into consideration while organising a concern into a number of departments: For example, the whole of overtime wages paid to the workers relating to a particular department should be charged to that department. Power, if separate meters are provided at each cost centre and fuel oil for boilers are other examples of allocation.
Absorption costing involves the following stages: This method is used for the apportionment of certain expenses as welfare and recreation expenses, medical expenses, time keeping, supervision etc. From the following information show the distribution of service departments cost under the repeated distribution method: In this method, the capital values of certain assets like machinery and building are used as basis for the apportionment of certain expenses e.
For example in a cotton textile mill, spinning, weaving and finishing departments are production departments. These departments are essential for smooth and efficient running of production departments.
From the following information prepare a manufacturing expense budget and calculate overhead recovery rates for the two production departments as percentages of direct labour:Note on Allocation, Apportionment & Absorption of Overheads Therefore, allocation of overheads means charging all the amount of cost to a particular department or cost centre.
For example repairs and maintenance for a machine should be charged or allocated to. The next step is allocation and apportionment of overheads.
This is also known as departmentalisation or primary distribution of overheads. Before understanding allocation and apportionment or departmentalisation of overheads, it is essential to study the different types.
Apportionment of Overheads | Cost Accountancy. Article shared by: ADVERTISEMENTS: Primary distribution involves apportionment or allocation of overhead to all departments in a factory on logical and rational basis. This process of apportionment is also known as departmentalisation of overhead.
It is to be carefully noted that at the time of. The major difference between allocation and apportionment methods are that allocation is used when the overhead can be directly related to one department and cost center, and apportionment is used when the overhead arises from a number of departments Cost allocation occurs when overheads and expenses are charged directly to the cost center.
Cost Allocation, Apportionment and Absorption of Overheads Google Drive Link for Download. mint-body.com Courtesy School of Management, NIT Rourkela MB. Allocation and Apportionment of Overheads / Job and Batch costing solution Question 1 (a) Overhead Analysis Sheet Overheads Basis of apportionment.Download