For the purpose of better control, better costing of jobs, products etc., the factory is divided into various departments by every manufacturing concerns. Each department is a cost centre. These departments are of two types- (i) production departments, & (ii) service departments. Actual production of output or carrying on the process or operation is done by the production department, while rendering of services to production departments is done by the service departments. Service departments are auxiliary departments, which do not produce but for the production departments their existence is essential, because production department cannot produce without the help of the service departments in terms of special types of services rendered by them.
In both production & service departments, expenses are incurred. Some expenses are incurred for the benefit of all departments. Thus, if for the benefit of any one department exclusively, an expense has been incurred, such expense can be charged to that department only; but on the other hand, if for the benefit of all the departments, an expense has been incurred, that has to be distributed on some suitable basis to all the departments. This process of distribution is called primary distribution. Assigning, allocating or apportioning the overhead expenses to all the departments of the factory to which they apply is represented by primary distribution.
Allocation of expenses:
Allocation means charging of that expense to a department or cost centre, which has been exclusively incurred for that department or cost centre. In other words, identification of overhead expense to a department & charging to that department only is called allocation. The question of sharing any expense by other departments does not arise, when such expense is allocated to a department. For example, where separate electric meters are provided, then for any department, the cost of electricity shown by electric bills is allocated to that department only.
Apportionment of expenses:
Apportionment is charging a fair share of an overhead expense to a cost centre or a department. For example, if separate electric meters are not provided to the departments, then only one electricity bill will be there & all the departments has to share the amount of the bill on some reasonable basis. Thus, apportionment is the charging of the reasonable share of the bill to cost centers or departments.
Distinction between Allocation & Apportionment:
- Items which are identifiable with one department are dealt with allocation. For example, indirect wages of departments X, Y & Z are obtained separately & hence the whole of the indirect wages amount of the respective department is charged to that department only. Therefore, allocation deals with whole items & with only a particular portion of an item of cost, apportionment deals with.
- Direct process of charging is indicated by allocation because by more than one cost centre, allocable costs need not be shared. On the other hand, ascertainment of reasonable share of an expense which the various departments benefitted are required to borne, is needed by apportionment. After the share of such expense which a particular department required to borne has been ascertained, to the department, amount of the share can be charged or apportioned.
- Allocation is a much wider term than apportionment.
- Upon the characteristic of the expense, the fact that whether an expense will be allocated or apportioned does not depends, but it depends upon the relationship between the cost centre or cost unit & the expense.
We must remember that,
- As the overheads cannot be easily identifiable with the products, they generally cannot be allocated to the products. On some suitable basis, overheads can be apportioned to or absorbed by the products.
- Certain overhead expenses (for example, indirect wages of departments) can be identified with a particular department & to that department, may be allocated but not to the products of the department. On some suitable basis, apportionment of such expenses relating to a department can be made to the products of the department.
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