What is Apportionment of Overheads, Principles, Difference

अनुक्रम (Contents)

Meaning of Apportionment of Overheads

Certain overheads costs cannot lie directly charged to a department or cost center. Such costs are common to a number of centers or departments and do not originate from any specific department.

Distribution of such overheads among department or cost centers on an equitable basis is known as apportionment. Thus, apportionment may be defined as that part of cost attribution which shares costs among two or move cost centers or cost units in proportion to the estimates benefit received using a proxy.

Thus, apportionment is done in case of those overheads items which cannot be wholly allocated to a particular department.

For example, factory rent which belongs to all departments, canteen which serves all employees manager who supervises all departments, etc. Thus, allocation is chaffing to a cost center as fair share of an overhead.

CAS 3, “Apportionment of overhead is distribution of overheads than one cost center on some equitable basis”

Difference between Allocation and Apportionment of Overheads

As seen above the purpose of both cost allocation and cost apportionment is the identification or allotment of items of cost to cost centers or cost units. However, the main difference between the two procedures lies in that:

(1) Allocation deals with whole Hems of costs whereas apportionment deals with proportions of items of cost.

(ii) Allocation is a direct process but apportionment may be made only indirectly and for which suitable bases are to be selected.

(iii) When overhead is related win some specific department or cost center, overheads are allocated, on the other hand if the overhead is related to several departments and cost centers, the overhead is apportioned.

Principles of Apportionment of Overheads

Apportionment of overhead to various production and service departments is based on the following principles:

(1) Principles of ability to pay: This is based on the theory of taxation which holds that those who have the largest income should bear the highest proportion of the tax burden.

In overhead distribution, those departments which have the largest income may be charged, die largest amount of overhead. This method is generally considered inequitable because it penalizes the efficient and the profitable units of the business to the advantages of inefficient ones.

(2) Survey or analysis method: This principle is frequently used to distribute such expenses as are not closely related to divisions or units of a product and whose remoteness necessitates an arbitrary distribution.

While making an arbitrary distribution survey of all those factors must be made which is likely to affect this distribution.

For example, salary of a general manager may be apportioned on the basis of the results of a survey which may reveal that 30% of his salary should be apportioned to sales, 10% to administration and 60% to various producing departments.

Similarly, lighting expenses may be apportioned on the basis of a survey of the number of tights, size, estimated hours of use, etc. (3) Principle of efficiency: Under this principle, production budget and

the overheads are also budgeted to achieve the production target. If the production is more man the budgeted one, the rate of overhead per unit of production will be less than the budgeted rate and vice versa. It tells of better efficiency.

So, the apportionment is made on the basis of standards set for each cost centers.

(4) Principle of service or use: Under this method, the service or benefit received is the basis of distribution. It is based on the theory that greater the amount of service or benefit received by department, the largest should be the share of the cost to be done by that department. This is the most common basis of apportionment of overhead costs.

The following are some of the common basis of apportionment of overheads:

(i) Direct labour hour basis: This is also referred to as production hour basis. This basis is adopted in those factory where labour is prominent For example, salary of factory’s manager, supervision expenses, research and development expenses, etc. can be apportionment on this basis

(ii) Value of asset basis: Overheads related to assets are apportioned in the ratio of their value, depreciation of assets, insurance of assets, etc.

(iii) Number of workers employed basis: Those expenses which vary with number of workers can be divided on that basis. For example, worker’s welfare expenses, canteen expenses, entertainment expenses hospital expenses. time keeping, group insurance, compensation, etc.

(iv) Area occupied basis: Those expenses which are more affected by area can be apportioned on the basis of area occupied by each department, rent and repair of building, lighting, municipal taxes, etc.

(v) Machine hour basis: This basis is adopted in those factory where machines are predominant. For example, power, repairs and maintenance of machines, depreciation of machinery, etc.

(vi) Direct labour basis: Expenses which directly vary with the departmental wages paid can be apportioned on the basis, e.g., insurance of workers, contribution to provident fund by employee, factory management expenses, etc.

(vii) Technical estimate basis: The advice of technical personnel may also be useful on the apportionment of certain expenses, e.g., lighting (No. of bulbs of Voltas basis), steam (consumed basis), delivery expenses quantity or tones or miles beam, etc.

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