Allocation vs Apportionment
Allocation and apportionment are methods that are used to assign various costs to their respective cost centers. Allocation can only be used when the entire expense is directly related to one department and apportionment is used when proportions of the expense arise from a number of different departments. The article offers a clear explanation of these terms with examples and points out how these methods of assigning costs are different to each other.
What is Allocation?
Cost allocation occurs when overheads and expenses are charged directly to the cost center. For example, the cost of direct labour (such as labour cost per unit produced) is directly allocated to the specific cost center which in this case will be a cost center related to manufacturing of goods. Another example would be, if an air conditioning unit is used separately by one department, the entire cost of using the air conditioner will be allocated to that specific department. There are a number of conditions that needs to be met in order for an overhead to be allocated. These conditions are that the expense must have been caused by the cost center and the specific amount of the expense or overhead should be known.
Allocation of overheads/expenses is more specific, and exact cost amounts can be charged directly to each cost center. However costs such as the salary of management personnel who is in charge of overseeing all departments cannot be allocated to one department and, therefore, another method must be used for distributing such costs.
What is Apportionment?
Cost apportionment occurs when a specific cost cannot be directly identified with one specific cost center. Any cost that does not belong to one department and is shared by a number of departments will be divided among these departments using apportionment. Taking the previous example of the manager’s salary, such as expense would have to be apportioned depending on a fair criteria. This could be something like the percentage of the manager’s time taken up in each specific department. Other overheads that require apportionment include property rent, water and utility bills, general administration salaries, etc. Expenses such as rent, water and utilities can be fairly shared among departments by using a basis such as square feet per department space.
What is the difference between Allocation and Apportionment?
Allocation and apportionment are methods that are used to divide up costs among various cost centers depending on which department or cost center each cost or portions of each cost belong. The major difference between allocation and apportionment methods are that allocation is used when the overhead can be directly related to one department and cost center, and apportionment is used when the overhead arises from a number of departments.
In allocation, the entire amount of the cost will be allocated to one department, and in apportionment proportions of the costs will be divided among their respective cost centers. Allocation is much easier and simpler to do as the expense will directly be related to one cost center. Apportionment can, however, be quite tricky as the percentage of the cost that needs to be assigned to each department may be difficult to decide.
Summary:
Allocation vs Apportionment
• Allocation and apportionment are methods that are used to divide up costs among various cost centers depending on which department or cost center each cost or portions of each cost belong.
• Cost allocation occurs when overheads and expenses are charged directly to the cost center.
• Cost apportionment occurs when a specific cost cannot be directly identified with one specific cost center.