Apportionment of Overhead (Primary Distribution) | Ch - Overheads | Cost Accounting | Lecture #1

Definition And Meanings Of Apportionment Of Overheads
There are certain overhead expenses which cannot be charged totally to a specific department or shop, Such expenses are apportioned in a suitable ratio over related departments or shops. Apportionment means distributing of overhead items to cost centers on a fair and reasonable basis.

Thus the principle is that if an overhead cannot be wholly allocated to a particular cost center, it must be apportioned over related cost centers. This involves finding out some suitable basis of apportionment that will enable the overhead to be equitably shared amongst concerned cost centers.

Procedure For Apportionment Of Overhead Expenses Through Departmentalization
For the purpose of apportionment of overhead expenses, the departments of a factory are divided into two categories i.e., production deparänents and service departments

Production Departments
Production departments are the departments directly engaged in the manufacturing of products e.g., cutting, stitching and finishing packing departments of a garments factory.

Service Departments
Service departments are the departments that do not perform operations on products to be manufactured but provide auxiliary services to. support operations in production departments e.g., repair and maintenance, purchasing, storeroom, training, payroll departments etc.

Principles Of Apportionment Of Overhead Expenses
The guidelines or principles which facilitate in determining a suitable basis for apportionment of overheads are explained below:

1. Derived Benefit
According to this principle, the apportionment of common items of overheads should be based on the actual benefit received by the respective cost centers. This method is applicable when the actual benefits are measurable. e.g., rent can be apportioned on the basis of the floor area occupied by each department.

Also Check:  Selling and Distribution Overheads
2. Potential Benefit
According to this principle, the apportionment of the common item of overheads should be based on potential benefits (i.e., benefits likely to be received). When the measurement of actual benefit is difficult or impossible or uneconomical this method is adopted. e.g., the cost of canteen can be apportioned on the basis of the number of employees in each department which is a potential benefit.

3. Ability to Pay
According to this principle, overheads should be apportioned on the basis of the saleability or income generating ability of respective departments. In other words, the departments which contribute more towards profit should get a higher proportion of overheads.

4. Efficiency Method
According to this principle, the apportionment of overheads is made on the basis of the production targets. If the target is higher, the unit cost reduces indicating higher efficiency. If the target is not achieved the unit cost goes up indicating inefficiency of the department.

5. Specific Criteria Method:
According to this principle, apportionment of overhead expenses is made on the basis of specific criteria determined in a survey. Hence this method is also known as “Survey method”. When it is difficult to select a suitable basis in other methods, this method is adopted. e.g., while apportioning salary of the foreman, a careful survey is made to know how much time and attention is given by him to different departments. On the basis of the above survey, the apportionment is made.

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