What Is The Difference Between Cost Allocation And Apportionment?

July 26th, 2006 Comments off
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This article differentiate cost allocation and apportionments:

Allocation Of Overheads or cost allocation

Is to directly and specifically charge the overheads to the cost center.

Two basic conditions exist before we can consider it as allocation:

  • The cost center must have caused the overhead to be incurred and
  • The exact amount of overhead must be known

Hence briefly, allocation is more precise in that direct charging of specific overhead costs to cost centres or departments can be made with a degree of certainty. Effectively the overhead cost is a specific charge to the cost centre.

Apportionment Of Overheads:

Where the overheads cannot be specifically identifiable to the specific cost unit center. Hence the need to find suitable basis to charge the various cost unit with a fair share of the overheads.

Illustration:

Types of Overheads Basis of apportionment

Rent, rates, water and utilities By Area

Office salaries, canteen, supervision By Number of employees

Depreciation of fixed assets Cost/book value

Briefly, cost apportionment is ARBITRARY wherein the cost is spread to departments on what is hopefully a fair and reasonable basis e.g rent and rates on the basis of area occupied, supervision costs based on the number of employees in each department.

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Financial Accounting

 
 

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