Allocation and apportionment: Departmental Accounting

Cost Allocation
Cost allocation is the process of identifying, aggregating and assigning costs to cost objects. A cost
object is any activity or item for which you want to separately measure costs. Examples of cost
objects are a product, a research project, a customer, a sales region, and a department.

Cost allocation is used for financial reporting purposes, to spread costs among departments or
inventory items. Cost allocation is also used in the calculation of profitability at the department or
subsidiary level, which in turn may be used as the basis for bonuses or the funding of additional
activities. Cost allocations can also be used in the derivation of transfer prices between
subsidiaries.

Apportionment
Apportionment of costs is the process of sharing a group’s expenditure among the individual
funding streams/programmes being implemented. This process is generally used to cover central
cost items such as salaries, general overhead, and ongoing running costs.

Cost apportionment occurs when a specific cost cannot be directly identified with one specific cost
center. Any cost that does not belong to one department and is shared by a number of
departments will be divided among these departments using apportionment.

Taking an example of the F&B manager’s salary, such as expense would have to be apportioned
(between Bar, Banquet, Restaurant etc.) depending on fair criteria. This could be something like
the percentage of the manager’s time taken up in each specific department. Other overheads that
require apportionment include property rent, water and utility bills, general administration
salaries, etc. Expenses such as rent, water and utilities can be fairly shared among departments
by using a basis such as square feet per department space.

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