Cambrige AS and A Level Accounting Notes (9706)/ ZIMSEC  Advanced Accounting Level Notes: Overhead apportionment, allocation and allotment

  • As already pointed out here at the first step of absorption costing  involves the processes of:
    1. Allocation
    2. Allotment and
    3. Apportionment
  • In very simple cases where there is only product none of this is necessary as overheads can be easily absorbed by the one product being made as shown in the example here
  • However in most instances the steps/processes named above are often necessary
  • All these processes involve the attribution of overheads to their various departments
  • There are some costs that are clearly associated with a given department for example the labour costs of a machine cleaner who only works in one department
  • Such costs can be “allocated” to the relevant department
  • Allocation-involves charging overheads directly to specific departments (production and service departments)
  • In some cases however there are overheads that relate to more than one specific department
  • Such overheads must be shared between these departments
  • Apportionment-is the process by which overheads are shared between two or more departments
  • Apportionment must be based on a logical, fair and reasonable bases
  • There are really no hard and fast rules on the bases to be used when apportioning costs among departments
  • The basis for apportionment are entirely up to management
  • Possible bases to be used when apportioning costs to their relevant departments include:
    1. Floor area this would be a sensible base to use when dealing with costs such as rent and rates overheads. Obviously if rent only pertains to one product and one department then such a cost would be added to the production cost of the relevant product or be allocated to the relevant department instead of apportioning it
    2. Carrying amount of non-current assets (i.e. net book value of fixed assets) for depreciation and insurance
    3. Number of employees for canteen costs
    4. Labour hours for labour
    5. Machine hours for depreciation
    6. Any other reasonable basis depending on the type of business in question
  • After the bases have been determined the costs are allocated and apportioned
  • The process is carried out on an overhead analysis sheet to show the details of the allocation and apportionment process
OverheadBasis of apportionmentAssembly
Indirect materials
Machine depreciation
Indirect labour
  • In simple instances where there is no service departments the total costs for each department are immediately shown
  • Where there is just one service department for example a staff Canteen the total costs for the department are assigned to the production department using a reasonable basis
  • For example with a Canteen the number of staff for each of the production department can be used to reassign these costs
  • Then a total for the production departments is calculated
  • The same is done for cases where there are two departments which do not offer services to one another
  • In reality however it is usually the case that when there is more than one service department, for example Canteen and Maintenance, these departments offer services to one another
  • For example Maintenance staff would eat in the Canteen while they also repair broken down equipment such as cookers in the Canteen kitchen
  • In such cases the solution would be to continuously apportion costs for service departments until there are no costs to apportion in the service departments
  • You will note that at A level you are unlikely to encounter questions that involve more than two service departments
  • Again once this process is complete the totals for the Production departments are determined
  • Once the total for each department is known an Absorption Rate is Calculated for that particular department
  • The rate is used to calculate the amount attributable to each unit of production
  • Follow this link to read more about Overhead Absorption Rates (OARs)

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