Bases of Apportionment and the Primary Distribution Summary

When an item of overhead is common to several departments, the amount charged to each department can only be as fair as the basis on which it is split. The guiding principle is that overhead should be apportioned on a basis that reflects, as closely as possible, the benefit each department receives from that expense, or the cause that gives rise to it. Choosing the wrong basis quietly distorts every product cost that flows from it.

Principles governing the choice of a basis of apportionment:

• Benefit received — apportion in proportion to the benefit each department draws from the expense (rent on floor area, since a bigger department uses more of the building).
• Ability / potential to receive service — where benefit cannot be measured directly, use a measure of the capacity to benefit (e.g. capital values for insurance of assets).
• Cause of the cost — apportion on the factor that actually causes the cost to be incurred (number of workers for canteen expenses, since more workers means a bigger canteen bill).
• Fairness and equity — the basis must be one that a reasonable person would accept as just, and it must be practical to measure.

Common items and their generally accepted bases of apportionment:

The Primary Distribution Summary. Once bases are chosen, all overheads are charged to all departments — both production and service — in one working statement called the primary distribution summary (also 'overhead distribution summary'). Each item is either allocated (charged whole to one department) or apportioned (split on its basis) across the columns, and the columns are then totalled to give the overhead of each department before any service-department cost is redistributed.

A typical primary distribution summary looks like this (illustrative figures):