Costing and Taxation · Ch 5 — Basic Concept of Overhead
Allocation and Apportionment: Primary Distribution of Overhead
Allocation and Apportionment: Primary Distribution of Overhead
Once Overhead items are collected for a period (by nature, from the books of account), the next task is distributing each item across the various departments (cost centres) of the factory that share it. This distribution happens in two possible stages: Primary Distribution — distributing every Overhead item, whether it belongs to one department alone or is shared across several, among ALL departments including service departments — and Secondary Distribution — re-apportioning the costs collected in service departments (like Stores or Maintenance) onward to the production departments they serve. This syllabus's scope is Primary Distribution only; Secondary Distribution (re-apportionment of service-department costs) is explicitly outside this unit.
Allocation
Allocation is charging an Overhead item WHOLLY and directly to one specific department or cost centre, because the item is identified with, and incurred solely for, that one department. No estimation or division is needed — the entire amount goes to the one department it can be traced to.
Examples: the salary of a supervisor who works only in one department is allocated wholly to that department; depreciation of a machine used only by one department is allocated wholly to that department; a specific department's own repair bill is allocated wholly to it.
Apportionment
Apportionment is dividing an Overhead item that is COMMON to two or more departments — and therefore cannot be traced wholly to any single one of them — across those departments, on some equitable basis. Because no direct link to one department exists, a reasonable, defensible basis must be chosen to share the item fairly, roughly in proportion to how much each department is judged to benefit from, or cause, that cost.
Allocation vs Apportionment — the one test that decides which applies
The deciding question is always: can this item be traced WHOLLY to ONE department? If yes, it is Allocation, however the item is described (rent, depreciation, salary — the TYPE of expense does not decide the answer). If the item is shared and cannot be so traced, it must be Apportioned on a chosen basis. A cost that is normally apportioned (like Power) becomes Allocated the moment it is separately, reliably measured for one specific department (for example, by a department-wise sub-meter) — traceability, not the nature of the item, is what matters.
Common bases of Primary Distribution (Apportionment)
| Basis of Apportionment | Typical Overhead items apportioned on this basis |
|---|---|
| Floor Area occupied | Rent and Rates, Building Depreciation, Lighting and Heating, Repairs to Building |
| Number of Employees | Canteen and Welfare Expenses, Time-Keeping, general Supervision (where shared) |
| Horse Power (or kWh) of machines | Power, Fuel for running machines |
| Value of Machinery (or Machine Hours) | Depreciation of Machinery, Insurance of Plant and Machinery, Repairs to Plant |
| Direct Wages | Employer's Contribution to Provident Fund and ESI, Workmen's Compensation Insurance |
| Value of Stock/Materials held | Insurance on Stock, Store-keeping expenses (where basis-appropriate) |
Primary Distribution Summary — the worked-problem format …
Charging an Overhead item wholly and directly to one specific department, because the item is identified with, and incurred solely for, that one department alone — no div …
Dividing an Overhead item common to two or more departments among those departments, on a reasonable basis (e.g., floor area, number of employees, horse power), because it cannot be tra …
The process of allocating and apportioning every Overhead item among ALL departments — production and service departments alike — as distinct from Secondary Distribution, which later re-apportions a service department's own costs onward to produc …