Definition§
What is Apportionment (Cost Apportionment)?§
Cost apportionment is a method in cost accounting used to distribute indirect costs (overheads) among different cost centres or cost units. This distribution is necessary because certain indirect costs benefit multiple cost centres or cost units simultaneously. A basis of apportionment must always be determined to ensure fair and consistent distribution of these costs.
Examples§
- Factory Rent: A company manufacturing various products needs to apportion the factory rent across different departments such as production, storage, and admin using a suitable basis of apportionment like square footage occupied.
- Utility Bills: Utilities for a building may be divided among the departments based on their relative use, such as the number of personnel or equipment in each area.
- Insurance: The insurance premium for the whole facility may need to be apportioned based on the value of equipment in each department.
Frequently Asked Questions§
What is a Basis of Apportionment?§
A basis of apportionment is a standard or criterion used to distribute costs among cost centres or cost units. Common bases include square footage, labor hours, machine hours, and headcount.
How is apportionment different from allocation?§
Apportionment is used when costs cannot be directly attributed to a single cost centre or unit, whereas allocation refers to charging costs directly to specific cost centres or units.
Why is cost apportionment important?§
It ensures that shared indirect costs are fairly and consistently allocated to all relevant cost centres, maintaining accurate financial records and enabling better cost control and management.
What are some common bases of apportionment?§
Some typical bases include but are not limited to:
- Square footage for rent and utilities
- Number of employees for HR-related costs
- Machine hours for maintenance costs
Can one cost be apportioned using different bases?§
Yes, depending on the company’s costing policies and the nature of the cost, different bases can be applied to different scenarios to effectuate the most equitable distribution.
Related Terms with Definitions§
- Cost Centre: A department within an organization to which costs are allocated or apportioned.
- Cost Unit: The measure of a product or service to which costs are allocated, for example, per unit, per batch, per kilometer.
- Cost Allocation: Directly assigning costs to cost centres or cost units.
- Indirect Cost: Costs that cannot be directly traced to a single cost centre or cost unit.
Online References§
Suggested Books for Further Studies§
- “Cost Accounting: A Managerial Emphasis” by Charles T. Horngren, Srikant M. Datar, and George Foster
- “Fundamentals of Cost Accounting” by William N. Lanen, Shannon Anderson, and Michael W. Maher
- “Cost and Management Accounting” by Drury Colin
- “Management and Cost Accounting” by Alnoor Bhimani, Charles T. Horngren, Srikant M. Datar, and Madhav Rajan
Accounting Basics: Apportionment Fundamentals Quiz§
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