Allocation and Apportionment of Overheads, Cost Accounting Notes B.Com 4th Sem CBCS Pattern

Allocation and Apportionment of Overheads

Cost Accounting Notes B.Com 4th Sem CBCS Pattern

After classification of overheads all the items of overheads are collected properly under suitable account heading. The next step is allocation and apportionment of overheads. This is also known as departmentalization or primary distribution of overheads.

Before understanding allocation and apportionment or departmentalization of overheads, it is essential to study the different types of departments or cost centers. In a manufacturing concern there can be broadly two categories of departments namely production departments and service departments.

Production Departments:

Production departments are those departments where actual process of manufacturing is carried on. For example in a cotton textile mill, spinning, weaving and finishing departments are production departments. In the production departments, with the help of manual and or machine operations the raw materials are converted to finished goods.

Example: In steel, rolling mill, hot mill, cold mill, polishing, grinding are the production departments.

Service Departments

Service departments are auxiliary and are those departments which are not directly engaged in production. These departments are essential for smooth and efficient running of production departments. Such departments render services such as repairs, maintenance, electricity, etc. for the benefit of other departments.

Example: Stores, cost office, personnel dept. labour welfare dept., canteen, time keeping, repairs and maintenance, tool room, hospital etc.

A department may be either production department or service department depending upon the nature and function. But there are some service departments which occasionally engaged in production apart from rendering services. These are called partly producing departments. For example, a carpentry unit which does repairs of furniture and fittings may be engaged to manufacture packing boxes. In such case it will be a partly producing department.

Allocation of Overhead Expenses

Allocation is the process of identification of overheads with cost centres. An expense which is directly identifiable with a specific cost centre is allocated to that centre. So it is the allotment of whole item of cost to a cost centre or cost unit or refers to the charging of expenses which can be identified wholly with a particular department. For example, the whole of overtime wages paid to the workers relating to a particular department should be charged to that department. So, the term allocation means the allotment of the whole item without division to a particular department or cost centre.

Apportionment of Overhead Expenses

Cost apportionment is the allotment of proportions of items to cost centres or cost units on an equitable basis. The term refers to the allotment of expenses which cannot identify wholly with a particular department. Such expenses require division and apportionment over two or more cost centres or units. So cost apportionment will arise in case of expenses common to more than one cost centre or unit. It is defined as the allotment to two or more cost centres of proportions of the common items of cost on the estimated basis of benefit received. Common items of overheads are rent and rates, depreciation, repairs and maintenance, lighting, works manager’s salary etc.

Difference between allocation and apportionment of overheads

Allocation Apportionment
1.       Allocation means the allotment of whole items of cost to cost centres or cost units.

2.       It deals with the whole items of cost.

3.       Cost is directly allocated to any cost centre or cost units.


4.       Cost is allocated when the cost centre uses whole of the benefits of the expenses.

1.       Apportionment means allotment of proportion of items of cost to cost centres or cost units.

2.       It deals with only proportion of items of cost.

3.       It needs a suitable basis for subdivision of cost by cost centres or cost units. Thus it is indirect process of allotment.

4.       Cost is apportioned when cost centres use only a proportion of the benefits of the whole expenses.

Bases of Apportionment of Overheads

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. 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. Therefore, the common expenses have to be apportioned or distributed over the departments on some equitable basis. The process of distribution is usually known as ‘Primary Distribution’.

Following are the main bases of overhead apportionment utilised in manufacturing concerns: 

(i) Direct Allocation: Overheads are directly allocated to various departments on the basis of expenses for each department respectively. Examples are: overtime premium of workers engaged in a particular department, power (when separate meters are available), jobbing repairs etc.

(ii) Direct Labour/Machine Hours: Under this basis, the overhead expenses are distributed to various departments in the ratio of total number of labour or machine hours worked in each department.

(iii) Value of Materials Passing through Cost Centres: This basis is adopted for expenses associated with material such as material handling expenses.

(iv) Direct Wages: This method is used only for those items of expenses which are booked with the amounts of wages, e.g., workers’ insurance, their contribution to provident fund, workers’ compensation etc.

(v) Number of Workers: This method is used for the apportionment of certain expenses as welfare and recreation expenses, medical expenses, time keeping, supervision etc.

(vi) Floor Area of Departments: 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.

(vii) Capital Values: In this method, the capital values of certain assets like machinery and building are used as basis for the apportionment of certain expenses e.g. rates, taxes, depreciation, maintenance, insurance charges of the building etc.

(viii) Light Points: This is used for apportioning lighting expenses.

(ix) Kilowatt Hours: This basis is used for the apportionment of power expenses.

(x) Technical Estimates: This basis of apportionment is used for the apportionment of those expenses for which it is difficult, to find out any other basis of apportionment. This is used for distributing lighting, electric power, works manager’s salary, internal transport, steam, water charges etc. when these are used for processes.

Guidelines or Principles of Apportionment

The guidelines or principles which facilitate in determining a suitable basis for apportionment of overheads are explained below:

1. Derived Benefit: According to this principle, the apportionment of common item of overheads should be based on the actual benefit received by the respective cost centers. This method is applicable when the actual benefits are measurable. For example, rent can be apportioned on the basis of floor area occupied by each department.

2. Potential Benefit: According to this principle, the apportionment of common item of overheads should be based on potential benefits (i.e. benefits likely to be received). When the measurement of actual benefit is difficult or impossible or uneconomical this method is adopted. For example, the cost of canteen can be apportioned as the basis of number of employees in each department which is a potential benefit.

3. Ability to pay: According to this method, overheads should be apportioned on the basis of the sales ability or income generating ability of respective departments. In other words, the departments which contribute more towards profit should get a higher proportion of overheads.

4.Efficiency method: According to this principle, the apportionment of overheads is made on the basis of the production targets. If the target is higher, the unit cost reduces indicating higher efficiency. If the target is not achieved the unit cost goes up indicating inefficiency of the department.

5. Specific criteria method: According to this principle, apportionment of overheads is made on the basis of specific criteria determined in a survey. Hence this method is also known as ‘Survey method’. When it is difficult to select a suitable basis in other methods, this method is adopted. For example, while apportioning salary of foreman, a careful survey is made to know how much time and attention is given by him to different departments. On the basis of the above survey the apportionment is made.

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