Friday, 12 July 2013

Apportion Overhead Costs

How to Apportion Overhead Costs

Apportionment of overhead costs means to divide total cost of overhead among different departments or branches or cost centers of a company. We need the steps of apportionment of overhead costs when there are many departments or cost centers of any company because when we know the overhead cost of each department, we can find the total cost of department. With this, we can compare the revenue of each department with their total cost. After this, we can take many decisions relating to particular department.

1st Step : To Classify the Cost Centers 

Cost Centers should be classified into production department and service department.

2nd Step : To Divide Total Overhead on Different Basis of Apportionment 

One of best step to apportion overhead costs is to know the basis of apportionment of overhead expenses and then to use them. All overhead will be allocated to the different department. For example, total rent is Rs. 5000. Area of production department is A 100 Sq. foot. Area of B department is 200 Sq. foot. Area of C department is 700 Sq. foot. Now total ratio of A : B : C  is 1 : 2 : 7

Total Rent Expense of A Department will be = 5000 X 1 /10 = Rs. 500

Total Rent Expense of B Department will be = 5000 X 2 / 10 = Rs. 1000

Total Rent Expense of C Department will be = 5000 X 7 / 10 = Rs. 3500


Total Rent = Rs. 5000

From above example, it is clear total overhead cost will be apportioned to different department on some basis. Basis of Rent apportionment is the area of department.

All Service department's cost is also reapportioned to the production department. For example, we have store department. Its store service cost is Rs. 1000. A department has consumed 4000 units. B department has consumed 6000 units. So,  store service department cost will be reapportioned on the basis of material consumed by different department.

A Department's Store service cost = 1000 X 4 / 10 = Rs. 400

B Department's Store service cost = 1000 X 6/10 = Rs. 600


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