Difference between Allocation and Apportionment of Production Overheads:
Allocation of Production Overheads – Definition and Examples:
Allocation of production overhead is a process to charge those overheads to cost center which result solely from the existence of that cost center. Cost allocation is therefore carried out where a cost can easily be identified with, and charged to, a particular cost center and cost unit. Allocation of production overheads may be done where the costs are directly attributable to a cost center.
Examples include the cost of repair work done in a particular production of a particular production department by an outside company, overheads relating to machines dedicated to the production of a particular product. Likewise time tickets or daily time reports will serve as a basis for the identification of indirect labor cost to specific departments. Moreover if separate meters are installed in each department for electricity or power then amounts for these expenses for each department are readily available. In all these cases there is no need to divide up the costs between products since the facility is used exclusively within a particular department.
Apportionment of Production Overheads – Definition and Examples:
Apportionment of production overhead is a process in which overheads cannot be directly allocated to products but must go through a more roundabout system to charge them to the cost units.
These indirect production overheads are incurred for the joint or common benefit of two or more than two departments. These costs are recorded jointly because of difficulty to keep them separately.
Examples includes rent and rates, heating costs, building repairs and maintenance, depreciation, etc. Such costs therefore, do not lend themselves to accurate allocation and as such have to be prorated to the concerned departments on some fair and equitable basis so as to reflect the relative use of that cost item by each cost center. The usual basis to apportionment of indirect factory overheads to different cost centers are as follows:
Basis of Apportionment to Cost Centers:
|Overhead Cost Item||Basis of Apportionment to Cost Centers|
|Floor area occupied||Building related expenses like rent and rates, cleaning, heating and lightning, repairs, depreciation and insurance of buildings.|
|Number of workers or employees||All employees related costs like canteen, supervision, personnel, medical and welfare expenses.|
|Cost or book value of machines||Machine related expenses e.g., depreciation, repairs, etc.|
|Number of store requisitions||Cost of store keeping, store keeper wages, etc.|
|Number of horse power||Power|