Friday, March 12, 2010

Fast Forward | Allocation, Apportionment and Re-apportionment

Hi Hasaan. OK straight to the point, I want to ask what is allocation, apportionment and re-apportionment. I am in the middle of overhead questions as I am doing F2. I am not sure about these terms. Sometime they use allocate cost and sometime apportion cost. Please help me out.


HEY! you have a question? Why not you too ask the way i - asked

 Relevance: CAT - T4 | ACCA - F2 and equivalent exams

Answer: While learning Production Overheads topic in CAT - T4 or ACCA - F2 we come across these terms for the first time.

It will be good if students learn more about the concept of Departmentalization of Overheads. And understand what difference it make, what are its implications and the advantages and disadvantages of using this technique as it will surely help them in understanding why different costing techniques are developed afterwards and why they are better.
Departmentalization technique is of the view that every production process involves two distinct set of departments:
  • Production department - actually responsible for converting raw material into finished product.
  • Service department - not involved directly but support production department in conversion process.

To calculate per unit cost of a product we need:
  • Raw material cost
  • Labour cost
  • Overhead cost

Raw material costs and Labour costs being the direct costs can be computed easily on per unit basis. But to compute the overheads we make overhead distribution sheet/chart/table.

This distribution of overhead cost can be divided in to two levels:
  1. Primary distribution
  2. Secondary distribution

PRIMARY DISTRIBUTION of costs involves allocation and/or apportionment, whereas SECONDARY DISTRIBUTION involves re-apportionment.

Under primary distribution, departments are charged with costs which are incurred by them either through allocation or apportionment without making any distinction between production or service departments.

Under secondary distribution, which involves re-apportionment, costs of service departments is apportioned "back" to production department (hence re-apportionment) or in simple words transferring costs of service departments to production departments.

Why we re-apportion costs of service departments to production department?
As service departments are working for production department, therefore every cost they are incurring is meant to support production department. Hence the costs incurred by service department is transferred to the same production department for which it was incurred.
Another reason that can be given is, as manufacturing cost is summation of costs incurred by production department. Therefore, true manufacturing cost must contain the cost of service departments also as they assisted in production. Hence the reason of "shifting" the cost back to the department which is the "reason of such cost"

Sometimes particular overheads are incurred by just one department therefore such overheads must be charged to such department only. This is allocation.

Sometimes particular overheads are caused by more than one department and unable to determine how much cost is incurred by which department we divide one overhead cost on arbitrary basis among different departments. This is apportionment.

Re- apportionment is simply a process or method of apportioning costs of service departments back to production departments.

>>> To be continued

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