Page 171 - DCOM202_COST_ACCOUNTING_I

Unit 8: Overheads

(ii) Allocation is a much wider term than apportionment, as it leads to apportionment. Notes
Overheads cannot be usually allocated to products as they cannot be identified easily, but
they can be apportioned to products on some equitable basis.
(iii) Certain overheads like telephone and electricity charges can only be allocated to products,
if they are apportioned on sound equitable basis.
(iv) Allocation needs no basis for the distribution of overheads among production and service
departments, while apportionment needs a equitable basis for the distribution of one
department overhead cost to other departments or cost centres or cost units.
(v) Cost allocation deals with whole items, whereas cost apportionment is concerned with
charging a share of the aggregate overhead to a number of departments or cost centres or
cost units.

Notes Both allocation and apportionment are concerned with the distribution of overheads.
Whereas allocation is the direct allotment of identifiable overheads to the relevant cost
centre, apportionment is the proportionate allotment of one department overhead to other
departments on an equitable basis.

Basis of Apportionment of Factory Overheads

The following are the basis of apportionment of factory overheads:
(a) Floor Area of Departmental Buildings: The overheads are apportioned on the basis of floor
area occupied by each department. This is a simple and better method. The values of the
buildings are not uniform, to cover expenses like lighting, heating, rent, etc.
(b) Number of Employees in Each Department: Overheads like canteen expenses, labour,
labour welfare expenses, wages of time-keepers, wages of factory manager, dispensary
expenses, etc., are apportioned on the basis of number of employees in each department.
(c) Percentage or Proportion of Buildings and Plants: Overheads related to buildings and
plants are apportioned in the ratio of their values, e.g. depreciation, insurance, rent, interest
on capital, etc.
(d) Departmental Production Hours: The overheads are apportioned on the basis of production
hours worked in each department. These hours may be machine hours or the direct labour
hours. The expenses of factory management, administration, supervision, research and
development, etc., are apportioned on this basis.
(e) Technical Basis: Technical basis is applied to apportion the following expenses: Expenses
of electricity and expenses of air, gas, steam and water.

™ z Electricity expenses can be apportioned on the basis of number of bulbs, tube-lights,
fans or watts of electricity, used in each department. If the departments have their
separate meters, the expenses of electricity can be apportioned in the ratio of separate
meter readings.
™ z Air, Gas, Steam and Water expenses can also be apportioned on technical basis in the
ratio of meter readings.

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