Overhead Accounting Part 2

Overhead Accounting
Allocation & Apportionment of Overheads

After the overheads costs are collected & codified the
next step is Allocation ands Apportionment.
Departmentalization or Primary Distribution

It is the process of allocation & apportionment of
overhead cost to different departments or cost
centres.
Cost centres/ departments are divided into:
1. Production deptt.
2. Service Deptt
Production Department
⚫ A production deptt/ cost centre: is engaged in
production activity by conversion of raw material into
⚫
finished production.
The number of such departments and their number
will depend upon the nature of industry, type of work
⚫
performed and the size of the factory.
For example, in Steel Rolling Mill, Hot Mill, Cold
Mill, Pickling Shop, Annealing Shop, Hardening,
Polishing and Grinding are the producing
departments.
Service Department
⚫ A Service Deptt/ costcentre : are those which are
ancillary to and render service to other production
⚫
and service cost centres.
The number of departments in a factory and the
names to be assigned to them depends upon size of
the factory, nature of industry and the nature of
⚫
service rendered.
The service departments, common to most concerns
are stores, cost office, personnel department,
planning and progress department, tool room,
hospital and dispensary, machine maintenance and
electrical maintenance section
Allocation of overheads
⚫ Allocation is the process of assigning the whole
⚫ Allocation can be done only when the exact item
item of cost directly to a cost centre
of overhead cost in a cost centre is definitely
⚫
known.
For example, the whole of overtime wages paid to
the workers relating to a particular department
should be charged to that department or the cost
of repairs and maintenance of a particular
machine should be charged to that particular
department wherein the machine is located
Apportionment of Overheads
⚫ Apportionment refers to proportionate
distribution of overheads to more than one cost
⚫
centre on a suitable basis.
Thus where a overhead cost is common to
different cost centres, it is charged to them on a
⚫
suitable basis.
For eg. factory rent, insurance, factory lighting etc.
may benefit a number of departments. The need
to be apportioned (i.e. distribution to various
departments in the factory)
Distinction between allocation & apportionment
Basis of Apportionment
Primary Distribution of Overheads
⚫ Primary distribution of overheads refers to allocation
and apportionment of overhead expenses among
production and service departments of an
⚫
organization.
This process involves allocation of overheads which
can be directly identified with a particular
department and apportionment of common item of
overheads on appropriate basis among all the
⚫
departments.
The entire process of allocation and apportionment is
systematically presented in a perform which is known
as primary distribution overhead summary or
overhead distribution summary.
Primary distribution Overhead summary
While preparing overheads distribution summary, it is
important to note:
that the direct costs of the service departments should be
considered as overheads. Hence the direct material, direct
labour and direct expenses of the service departments are
allocated directly and recorded in the overheads
distribution summary since these are overheads from
production point of view.
But the direct material, direct labour and direct expenses

of the production departments need to be excluded from
this summary since these are not overheads.
Re-apportionment of Service Department
cost (secondary distribution)
⚫ Once the overheads have been allocated or
apportioned to production & service department the
next step is to reapportion the total cost of
⚫
service department to production department.
The ultimate objective is to charge the entire
overheads to cost units as cost units are produced in
the production deptt. Thus the cost of the service
⚫
deptt must be charged to the production deptt.
This is known as Secondary distribution
Basis for Secondary Distribution
Apportionment of service department
overheads
Re-apportionment of service deptt

cost
Re-app to prod. Re app to prod. &

Deptt only service deptt
Non-reciprocal Reciprocal
basis basis
Repeated
Trial & error Simultaneous
distribution
method equation method
method
Reapportionment to production
department only
⚫ This method is adopted when the various service

departments render services only to the production
department and there is no exchange of services
among them.
Do eg. 3 from S. singh pg 5.15

OR
Do illustration 4.3 from MN Arora pg 4.14
Reapportionment to production as well as
service deptt.
⚫ This method is followed when the service department
provides services not only to the production deptt
but also to other service deptt.
⚫ For eg. Power house service deptt provides electricity

service to both production and other services
department like maintenance deptt, canteen deptt.,
⚫
warehousing deptt etc.
This type of inter-service deptt apportionment may
be either reciprocal or non-reciprocal.
Reciprocal and non-reciprocal basis of
apportionment
⚫ Non- Reciprocal basis: is when the service deptt

renders service to the production and other service
deptt but does not receive services of other deptts i.e
one-way flow.
⚫ Service department are not inter-dependent
⚫ We follow the step- ladder method: Do eg. 4 from S.

singh. Pg 5.17 or ills 4.4 mn arora pg 4.16
Reciprocal and reciprocal basis of
apportionment
⚫ This method of apportionment is used when the

service department renders service to production as
well as other service departments and in turn also
receives services from other service department.
⚫ Service departments are inter-dependent on one
⚫
another.
For eg: Power house provides electricity to
maintenance deptt and in turn receives maintenance
from them.
Methods of reciprocal basis
Repeated distribution method: refer- eg. 5 S. singh
book pg 5.18
Trial and Error method: refer eg 6 S. singh book pg

5.19
Simultaneous equation method: refer eg 7 s. singh

book pg 5.21

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Overhead Accounting

Allocation & Apportionment of Overheads

Departmentalization or Primary Distribution

of overhead cost in a cost centre is deﬁnitely

But the direct material, direct labour and direct expenses

Re-apportionment of service deptt

Re-app to prod. Re app to prod. &

⚫ This method is adopted when the various service

Do eg. 3 from S. singh pg 5.15

⚫ For eg. Power house service deptt provides electricity

⚫ Non- Reciprocal basis: is when the service deptt

⚫ Service department are not inter-dependent

⚫ We follow the step- ladder method: Do eg. 4 from S.

⚫ This method of apportionment is used when the

⚫ Service departments are inter-dependent on one

Trial and Error method: refer eg 6 S. singh book pg

Simultaneous equation method: refer eg 7 s. singh

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