Page 170 - DCOM202_COST_ACCOUNTING_I

Cost Accounting – I

Notes Distribution of total overheads between production and service departments and the allocation of
all service departments overhead to the production department is known as departmentalization
of overhead costs. Departmentalisation of overheads not only helps in segregating the industry
overheads among production and service departments but also in accurately ascertaining the cost
of different products which pass through these departments. Departmentalisation of overhead
costs enables the distribution of costs of service departments to various production departments
or production units.

Objectives of departmentalisation of Overheads

The following are the main objectives of departmentalisation:
(i) Forecasting, planning and decision-making,
(ii) Ascertaining the cost of various departments,
(iii) Effective control on overhead cost,

(iv) Valuation of work-in-progress, and
(v) Ensure greater accuracy in allocation and apportionment of overheads.

Allocation of Overhead

Allocation of overhead cost refers to “the allotment of whole items of overhead costs to cost
centre or cost unit”. In other words, allocation implies the identification of the overhead costs
with reference to particular cost centre, i.e., production and service departments to which they
relate. It involves charging to a cost centre those overheads which arise solely from the existence
of that centre. Obviously, prior to charging overhead to a particular department or cost centre or
cost unit, the exact amount of overhead expense attributable to it must be known allocation of
overheads. Allocation of overheads is, therefore, the process of distribution of overhead expenses
on a departmental basis. Some items like wages paid to maintenance workers cannot be directly
attributed to product but can be specifically attributed to the maintenance service department.
Such items of cost as indirect materials, indirect labour, etc., can also be allocated to different
departments or cost centre.

Apportionment of Overhead

Apportionment refers to the distribution of overheads among different departments or cost
centre on suitable basis. It involves charging a share of the total overhead cost to a number of cost
centres, Indirect expense such as rent, lighting and telephone charges, general managers salary,
etc., incurred for the entire factory need to be apportioned between different production and
service departments on an equitable basis. The service department overhead costs, in turn, need
to be apportioned among the production departments. Finally, the aggregate overhead cost of
each production department is charged to the cost centre or cost unit, i.e., products, processes or
jobs. This type of apportionment is known as absorption of overhead.

distinction between Allocation and Apportionment

The terms allocation and apportionment are often used interchangeably. Although, the purpose
of both is the identification and allotment of overheads to cost centre or cost unit, but there is
difference between the two. The following points will make the distinction clear:
(i) Allocation refers to the distribution of overheads on departmental basis, while
apportionment is a process of distribution of overhead costs of one department to the other
department.

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