Allocation & Apportionment of Overheads (Cambridge International A-Level Accounting)
Spec point — how to allocate and apportion overhead expenditure between production and service departments
Allocation & apportionment of overheads
What is allocation?
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Allocation is the charging of overheads that can be directly attributed to a specific cost centre
- E.g. salary of workers in a factory can be allocated to production department
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The entire cost of that overhead is charged to the cost centre
What is apportionment?
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Apportionment is the charging of overheads that cannot be directly attributed to a cost centre
- E.g. electricity is shared between the cutting department and the finishing department
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The cost overhead is shared between cost centres using an appropriate basis
- E.g. electricity is apportioned based on the amount of energy usage by the departments
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The table shows different overhead costs and their typical basis of apportionment
| Overhead cost | Typical basis of apportionment |
|---|---|
| Rent/rates | Floor area (sq metres) |
| Electricity | Kilowatt-hours (KWh) |
| Depreciation | Cost of machinery |
| Supervisors' salaries | Number of employees |
How are production costs apportioned?
- Production costs are apportioned to both production and service departments using a suitable basis of apportionment
Worked Example The company uses a system of absorption costing. There are 2 production departments (painting and sewing) and 2 service departments (technical support and personnel).
The following information is available:
Painting: Sewing Technical support Personnel Overheads allocated 250 000 268 000 30 570 17 500 Floor area (square metres) 90 70 15 5 Power (kW-hours) 120 320 40 20 The following budgeted overheads are to be apportioned:
Electricity $20 500
Building insurance $11 880
Prepare a table to show the apportionment of the budgeted overheads to both the production and service departments.
Answer:
Electricity
Apportion electricity ($20 500) based on power (kW-hours):
- Find the total power used
120 + 320 + 40 + 20 = 500 kW-hours
- Apportion the total to each department based on its power usage
Painting: (120 ÷ 500) × $20 500 = $4 920
Sewing: (320 ÷ 500) × $20 500 = $13 120
Technical support: (40 ÷ 500) × $20 500 = $1 640
Personnel: (20 ÷ 500) × $20 500 = $820
Buildings insurance
Apportion buildings insurance ($11 880) based on floor area (square metres):
- Find the total floor area
90 + 70 + 15 + 5 = 180 square metres
- Apportion the total to each department based on its floor area
Painting: (90 ÷ 180) × $11 800 = $5 940
Sewing: (70 ÷ 180) × $11 800 = $4 620
Technical support: (15 ÷ 180) × $11 800 = $990
Personnel: (5 ÷ 180) × $11 800 = $330
Total overheads
- Calculate the total overheads for each department
Total Painting Sewing Technical support Personnel Overheads allocated 566 070 250 000 268 000 30 570 17 500 Electricity 20 500 4 920 13 120 1 640 820 Buildings insurance 11 880 5 940 4 620 990 330 Total overheads: Final answer: 598 450 Final answer: 260 860 Final answer: 285 740 Final answer: 33 200 Final answer: 18 650
How are service costs apportioned?
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Once overheads are allocated and apportioned, service department costs are re-apportioned to production departments using a basis of apportionment related to the usage of that service department
- E.g. using the number of workers in each department to re-apportion the canteen department cost
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If there are two or more service departments, then the one which serves the most other departments is re-apportioned first
- E.g. the canteen department provides a service to the maintenance department so the costs from the canteen department should be reapportioned first
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The table shows different service department costs and their typical basis of apportionment
| Service department cost | Typical basis of apportionment |
|---|---|
| Canteen/welfare | Number of employees |
| Stores/warehouse | Number of requisitions/issues |
| Maintenance | Number of machines |
Exam Hint In exam questions, there are commonly two service departments. The exam question will typically tell you which order to apportion the costs. You usually have to fill in a table.
Worked Example Given the data below, re-apportion the service department overheads to the production departments and calculate the total overheads for painting and sewing departments.
Painting Sewing Technical support Personnel Total overheads apportioned 260 860 285 740 33 200 18 650 Number of employees 20 15 5 10 Technical support hours 400 60 - - Answer:
Personnel overheads
Re-apportion personnel overheads ($18 650) based on number of employees
- Calculate the total number of employees
20 + 15 + 5 = 40 employees
- Apportion the total to each department based on its number of employees
Painting: (20 ÷ 40) × $18 650 = $9 325
Sewing: (15 ÷ 40) × $18 650 = $6 993.75
Technical support: (5 ÷ 40) × $18 650 = $2 331.25
Find the subtotals
Painting: $260 860 + $9 325 = $270 185
Sewing: $285 740 + $6 993.75 = $292 733.75
Technical support: $33 200 + $2 331.25 = $35 531.25
Technical support overheads
Re-apportion technical support overheads based on technical support hours
- Calculate the total number of technical support hours
400 + 60 = 460 technical support hours
- Apportion the total to each department based on its number of technical support hours
Painting: (400 ÷ 460) × $35 531.25 = $30 896.74
Sewing: (60 ÷ 460) × $35 531.25 = $4 634.51
Total overheads
- Calculate the total overheads for each department
Painting Sewing Technical support Personnel Total overheads apportioned 260 860 285 740 33 200 18 650 Apportion personnel 9 325 6 993.75 2 331.25 (18 650) Subtotal 270 185 292 733.75 35 531.25 - Apportion technical support 30 896.74 4 634.51 (35 531.25) - Total Final answer: 301 081.74 Final answer: 297 368.26 - -
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