Cost Allocation and ApportionmentCost Allocation:
Certain items of overhead costs can be directlyidentified with a particular department or cost centreas having been incurred for that cost centre.Allotment of such costs to departments or costcentres is known as allocation. Thus, allocation may be defined as “the allotment of whole items of costcentres or cost units.”A point to be understood is that allocation can bemade only when exact amount of overheads thatresult solely from the existence of that cost centre.In brief, in order that an overhead can be allocated , itshould meet both of the following conditions:(a)The cost centre must have caused the overheadto be incurred.
(b)
The exact amount incurred in a cost centre
must be known.
Apportionment:
Certain overhead costs cannot be directly chargedto a department or cost centre. Such costs arecommon to a number of cost centres or departments and do not originate from any specificdepartment. Distribution of such overhead costs tovarious departments is known as apportionment.
Thus, apportionment may be defined as “theallotment of proportions of items of cost centres or cost units.”
Difference between Cost Allocation andApportionmentCost AllocationApportionment
1. Deals with whole items of costs.1. Deals with proportions of items of cost.2. Is a direct Process2. Is a Indirect Process for which suitable bases are to beselected.3. Cost allocation dependsupon the nature of cost.3. Apportionment does notdepend upon the nature of cost. Apportionment on Reciprocal Basis:This method is used when service departments aremutually dependent. This means a servicedepartment not only provides its services to other service departments but also receives services of other services departments.
The following methods may be used for apportionment of overhead costs on a reciprocal basis:1.Simultaneous Equation Method2.Repeated Distribution Method3.Trial and Error Method
1.Simultaneous Equation Method
In this method, the following algebraic equationshelp in finding out cost of service departments.Illustration 1. A company has three productiondepartments and two service departments.Distribution summary of overheads is as follows:Production DepartmentsService DepartmentsARs.3,0001.Rs.234BRs.2,0002.Rs.300CRs.1,000The expenses of service departments are chargedon a percentage basis which is as follows: ABC121.20%40%30%-10%2.40%20%20%20%-
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