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
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Total Rent = Rs. 5000
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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
