Answer to Question #311643 in Management for Priya

Question

Department A’s manager wishes to apportionment the indirect expenses identifiable with department A to all the other departments of the organization. However, the managers of other departments opine that the indirect expenses allocated to department A cannot be apportioned to other departments. Elucidate the terms ‘allocation and apportionment’ and bring out the differences between them to department A’s manager. Also, provide five examples of cost items to the manager that are suitable for apportionment and their respective basis of apportionment. Identify if department A’s manager was correct.

Answer 1

Allocation of cost means a process in which the entire amount of overhead is charged to a specific cost centre. On the other hand, apportionment of the cost is needed when the cost cannot be allocated to a particular cost centre. The cost is shared by two or more cost centres, as per the expected benefit received.

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.

Similarly, the cost of repairs and maintenance of a particular machine should be charged to that particular department wherein the machine is located. Power, if separate meters are provided at each cost centre and fuel oil for boilers are other examples of allocation.

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.