ASCM-L08 — Overhead Allocation & Apportionment
Understanding how indirect costs are distributed among production and service departments before being absorbed into product costs.
Learning Objectives
By the end of this lesson students should be able to:
• define overhead allocation
• define overhead apportionment
• distinguish allocation and apportionment
• allocate overheads appropriately
• apportion overheads using suitable bases
• prepare overhead analysis statements
• answer examination-style questions
CONCEPT OVERVIEW
Why Overheads Need Distribution
Many indirect costs cannot be directly traced to a specific product.
These costs must first be assigned to departments before being absorbed into product costs.
Examples of Production Overheads
✓ Factory Rent
✓ Factory Insurance
✓ Factory Lighting
✓ Heating Costs
✓ Supervisor Salaries
✓ Depreciation of Equipment
ALLOCATION VS APPORTIONMENT
| Allocation | Apportionment |
|---|---|
| Entire cost assigned | Cost shared |
| Direct relationship exists | Shared benefit exists |
| No basis required | Fair basis required |
| Simpler process | More judgement required |
OVERHEAD ALLOCATION
Definition
Allocation is the process of assigning an entire overhead cost directly to a specific department or cost centre.
The overhead belongs wholly to that department.
Examples
| Overhead | Allocation Basis |
|---|---|
| Supervisor Salary | Direct Allocation |
| Machine Depreciation | Direct Allocation |
| Department-Specific Insurance | Direct Allocation |
Example
Machine Depreciation
Department A:
£6,000
Department B:
£0
Entire cost allocated to Department A.
OVERHEAD APPORTIONMENT
Definition
Apportionment is the process of sharing an overhead cost between departments using a fair basis.
The overhead benefits multiple departments.
Common Bases of Apportionment
| Overhead | Basis |
|---|---|
| Rent | Floor Area |
| Heating | Floor Area |
| Electricity | Machine Hours |
| Insurance | Asset Value |
| Canteen Costs | Number of Employees |
Example
Factory Rent:
£12,000
Floor Area:
Department A:
60%
Department B:
40%
Rent Apportioned:
A = £7,200
B = £4,800
OVERHEAD APPORTIONMENT
Definition
Apportionment is the process of sharing an overhead cost between departments using a fair basis.
The overhead benefits multiple departments.
Common Bases of Apportionment
| Overhead | Basis |
|---|---|
| Rent | Floor Area |
| Heating | Floor Area |
| Electricity | Machine Hours |
| Insurance | Asset Value |
| Canteen Costs | Number of Employees |
Example
Factory Rent:
£12,000
Floor Area:
Department A:
60%
Department B:
40%
Rent Apportioned:
A = £7,200
B = £4,800
COST CENTRES
Production Cost Centres
Departments directly involved in manufacturing.
Examples:
✓ Assembly
✓ Machining
✓ Finishing
✓ Packaging
Service Cost Centres
Departments supporting production.
Examples:
✓ Maintenance
✓ Stores
✓ Personnel
✓ Canteen
OVERHEAD ANALYSIS SHEET
Purpose
An overhead analysis sheet shows how indirect costs are allocated and apportioned among departments.
Simplified Example
| Overhead | Total (£) | Dept A (£) | Dept B (£) |
|---|---|---|---|
| Rent | 10,000 | 6,000 | 4,000 |
| Insurance | 5,000 | 3,000 | 2,000 |
| Lighting | 3,000 | 1,800 | 1,200 |
| Total | 18,000 | 10,800 | 7,200 |
RE-APPORTIONMENT OF SERVICE COSTS
Why Re-Apportion?
Service departments do not produce goods directly.
Their costs must eventually be transferred to production departments.
Example
Maintenance Department:
£5,000
Used by:
Production A:
70%
Production B:
30%
Re-Apportionment:
A = £3,500
B = £1,500
Structured Practice
Level 1 — Concept Check
Define:
a) Allocation
b) Apportionment
Level 2 — Application
Explain why factory rent is normally apportioned rather than allocated.
Level 3 – Examination Style Question
Factory Rent:
£15,000Floor Area:
Department A:
70%Department B:
30%Calculate the rent apportioned to each department.
(4 marks)
📌 Additional structured questions are available in the 🎯 Question Papers + YouTube Explanation section.
∗ Additional structured questions are available in the Question Papers and YouTube Explanation section. Students should practise regularly and review video explanations for procedural clarity.
Enrolled students may submit questions from recognised textbooks, past examination papers or other genuine academic material for expert clarification through the Student Doubt Support facility.
ACADEMIC SUPPORT NOTE
📌 Overhead allocation and apportionment are fundamental examination topics and form the basis of absorption costing.
Students should master:
✓ Cost Centres
✓ Allocation
✓ Apportionment
✓ Re-Apportionment
✓ Overhead Analysis Statements
✓ Departmental Overhead Calculations
🎥 Full worked examples are available in the YouTube Learning Library.
📩 Students may submit overhead costing doubts through the Student Doubt Support facility.
Proficiency Check
Learn → Practise → Apply → Evaluate
1. Can you distinguish allocation and apportionment?
2. Can you identify suitable apportionment bases?
3. Can you prepare overhead analysis statements?
4. Can you allocate overheads accurately?
5. Can you apportion overheads correctly?
6. Can you re-apportion service department costs?
If unsure, revisit:
• Allocation
• Apportionment
• Cost Centres
• Re-Apportionment
• Worked Examples
Detailed Activity Solutions
Solution to Level 3 question
Factory Rent:
£15,000
Department A:
70% × £15,000
= £10,500
Department B:
30% × £15,000
= £4,500
HOW THIS TOPIC APPEARS IN THE EXAMINATION
Common examination tasks include:
✓ Allocation Questions
✓ Apportionment Calculations
✓ Overhead Analysis Statements
✓ Service Cost Centre Re-Apportionment
✓ Departmental Overhead Calculations
✓ Cost Centre Comparisons
Self-Assessment Checklist
□ I understand overhead allocation
□ I understand overhead apportionment
□ I can identify suitable bases
□ I can prepare overhead analysis sheets
□ I can re-apportion service department costs
□ I can answer examination questions confidently
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GUESS PAPERS
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