Cost apportionment or overhead apportionment is used to distribute general overheads which relate to more than one cost center, between cost centers.
Difference Between Cost Allocation and Cost Apportionment
In order to understand cost apportionment, it is necessary to distinguish it from cost allocation, which is used to allocate overhead that is specifically identified with a cost center to that cost center, and cost absorption, which is the addition of allocated and apportioned costs to unit, job, or batch costs.
The diagram below summarizes the how cost apportionment differs from allocation and absorption.
In the diagram, the overhead cost which has previously been allocated to the general overhead cost center, is apportioned between the two production departments shown as the manufacturing and finishing departments. The costs from the manufacturing and finishing departments are then absorbed into the production units.
Cost Apportionment Base
A cost apportionment base is the basis used by a business to apportion its overhead costs. The apportionment base is usually a quantity such as the floor area of a department, book value of machinery, number of employees, machine hours used, or kilowatt hours of electricity used.
The base used should be appropriate for the overhead cost to ensure that the cost is fairly apportioned between cost centers. For example, personnel costs might be included in general overhead and then be apportioned to other departments based on the number of employees in that department, or depreciation might be apportioned based on the book value of machines used within a department.
The overhead cost is then apportioned using the following formula for each base.
Cost Apportionment Example
A business operates four cost centers manufacturing, finishing, service and general overhead. Overheads are allocated to each department and subsequently the general overhead is apportioned to both the production and finishing departments using an appropriate base.
1. Identify the General Overhead
General overheads are costs which cannot be directly allocated to a specific cost center or department. For example, the salary cost of a manufacturing department supervisor can be directly allocated to the manufacturing department, and for the purpose of this exercise is therefore not regarded general overhead. On the other hand, the insurance cost for the premises cannot be directly allocated to one department and is therefore included in general overheads to be apportioned between departments.
During the accounting period the business incurs the following general overhead costs.
| Cost | Amount |
|---|---|
| Electricity | 9,000 |
| Repairs | 4,300 |
| Depreciation | 24,000 |
| Rent and insurance | 36,500 |
| Staff canteen | 7,000 |
| Staff training | 4,000 |
| Total | 84,800 |
2. Decide on the Apportionment Base
The general overhead costs are each assigned an appropriate apportionment base as follows.
| Cost | Base |
|---|---|
| Electricity | Kilowatt hours |
| Building repairs | Floor area |
| Depreciation | Machine book value |
| Rent and insurance | Floor area |
| Staff canteen costs | Employees |
| Staff training | Employees |
3. Collect Base Information for Each Department
In this example, the administrative overhead totaling 22,000 is to be apportioned to the production and finishing departments using the appropriate base.
During the period the following information was recorded for the production and finishing departments.
| Base | Manufacturing | Finishing | Service |
|---|---|---|---|
| Floor area | 4,000 | 3,000 | 1,500 |
| Machine book value | 35,000 | 20,000 | 9,000 |
| Number of employees | 28 | 22 | 15 |
| Kilowatt hours | 45,000 | 26,000 | 19,000 |
4. Apportion the Overhead to Departments
Using the departmental information, the cost apportioned to each department can be calculated using the formula above.
Electricity Apportionment = Cost x Department kWh / Total kWh Manufacturing = 9,000 x 45,000 / 90,000 = 4,500 Finishing = 9,000 x 26,000 / 90,000 = 2,600 Servicing = 9,000 x 19,000 / 90,000 = 1,900 Building repairs Apportionment = Cost x Department floor area / Total floor area Manufacturing = 4,300 x 4,000 / 8,500 = 2,024 Finishing = 4,300 x 3,000 / 8,500 = 1,518 Servicing = 4,300 x 1,500 / 8,500 = 759 Depreciation Apportionment = Cost x Department machinery value / Total machinery value Manufacturing = 24,000 x 35,000 / 64,000 = 13,125 Finishing = 24,000 x 20,000 / 64,000 = 7,500 Servicing = 24,000 x 9,000 / 64,000 = 3,375 Rent and insurance Apportionment = Cost x Department floor area / Total floor area Manufacturing = 36,500 x 4,000 / 8,500 =17,176 Finishing = 36,500 x 3,000 / 8,500 = 12,882 Servicing = 36,500 x 1,500 / 8,500 = 6,441 Staff canteen costs Apportionment = Cost x Department employees / Total employees Manufacturing = 7,000 x 28 / 65 = 3,015 Finishing = 7,000 x 22 / 65 = 2,369 Servicing = 7,000 x 15 / 65 = 1,615 Staff training Apportionment = Cost x Department employees / Total employees Manufacturing = 4,000 x 28 / 65 = 1,723 Finishing = 4,000 x 22 / 65 = 1,354 Servicing = 4,000 x 15 / 65 = 923
Summary
The table below summarizes the apportionment of the general overheads to each department based on the calculations shown above.
| Overhead | Manufacturing | Finishing | Service |
|---|---|---|---|
| Electricity | 4,500 | 2,600 | 1,900 |
| Building repairs | 2,204 | 1,518 | 759 |
| Depreciation | 13,125 | 7,500 | 3,375 |
| Rent and insurance | 17,176 | 12,882 | 6,441 |
| Staff canteen | 3,015 | 2,369 | 1,615 |
| Staff training | 1,723 | 1,354 | 923 |
| Total | 41,563 | 28,223 | 15,013 |
The general overhead cost (84,800) has now been apportioned to the manufacturing (41,563), finishing (28,223), and servicing (15,013) departments.
Our overhead apportionment calculator can be used to apportion overheads between cost centers by entering details of the amount of overhead and the apportionment base for up to eight overhead types and six departments.
About the Author
Chartered accountant Michael Brown is the founder and CEO of Double Entry Bookkeeping. He has worked as an accountant and consultant for more than 25 years and has built financial models for all types of industries. He has been the CFO or controller of both small and medium sized companies and has run small businesses of his own. He has been a manager and an auditor with Deloitte, a big 4 accountancy firm, and holds a degree from Loughborough University.