Fast Forward | Allocation, Apportionment

and Re-apportionment
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:

Primary distribution
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.