Departmentalization: Allocation and Apportionment of Overheads

Once overhead has been collected, the next task is to charge it to the departments or cost centres where it belongs — this is called departmentalization of overhead. A factory is divided into production departments (where the actual manufacturing takes place — the machine shop, the assembly shop) and service departments (which do not make the product themselves but help production — the stores, the maintenance shop, the canteen, the power house). Departmentalization charges every item of overhead to these departments through two distinct techniques: allocation and apportionment.

Allocation of overhead is the charging of a whole item of overhead directly to one particular department, because that item was incurred wholly and solely for that department. There is no sharing or splitting involved — the entire amount is allotted to a single cost centre. For example, the salary of the foreman of the machine shop is allocated entirely to the machine shop; the depreciation of a machine used only in the assembly department is allocated entirely to the assembly department; power consumed by a department that has its own separate meter is allocated to that department.

Apportionment of overhead is the sharing (splitting) of an item of overhead that is common to several departments, over those departments, on some fair and reasonable basis. Here the item cannot be traced to any one department because it benefits many — factory rent benefits every department in the building, the works manager's salary covers the whole works — so its total is divided among the departments in proportion to a suitable basis (floor area for rent, number of workers for supervision).

The key distinction — and a favourite examination point — is this: