1. Introduction and Objectives
Because overheads are indirect, they must be shared across departments using systematic allocation methods. This process, known as Stage 1 Overhead Distribution, moves costs from the primary corporate ledger into specific production and service cost centers.
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2. Primary Allocation vs. Apportionment
- Allocation: Charging an overhead cost directly to a single cost center when its responsibility can be clearly isolated. For example, if a specific department has its own dedicated electricity meter, its power bill is allocated directly to that department.
- Apportionment: Dividing a shared overhead cost across multiple departments using an equitable distribution base. The choice of base should reflect the factor that drives the expense.
3. Standard Apportionment Bases
| Shared Overhead Cost | Preferred Basis of Apportionment |
|---|---|
| Factory Rent, Rates, Heating | Floor area occupied by each department (square meters). |
| Equipment Depreciation, Power | Value of machinery or total kilowatt-hours used. |
| Canteen Costs, Personnel Services | Number of employees working in each department. |
| Building Store Expenses | Total number of material requisitions processed. |