Apportionment

Apportionment Cost Apportionment Cost Allocation Cost Centre Cost Unit
Cost apportionment is the method of charging a proportion of a cost to a cost centre or cost unit because these cost centres or units share in incurring those costs without directly incurring them. A basis of apportionment is always required.
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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

  1. 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.
  2. 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.
  3. 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.

  • 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

  1. “Cost Accounting: A Managerial Emphasis” by Charles T. Horngren, Srikant M. Datar, and George Foster
  2. “Fundamentals of Cost Accounting” by William N. Lanen, Shannon Anderson, and Michael W. Maher
  3. “Cost and Management Accounting” by Drury Colin
  4. “Management and Cost Accounting” by Alnoor Bhimani, Charles T. Horngren, Srikant M. Datar, and Madhav Rajan

Accounting Basics: Apportionment Fundamentals Quiz

### What does cost apportionment primarily deal with? - [ ] Directly assigning costs to cost centres - [x] Distributing indirect costs among cost centres or cost units - [ ] Eliminating costs altogether - [ ] Recording revenue generation > **Explanation:** Cost apportionment involves distributing indirect costs that cannot be directly attributed to specific cost centres or cost units. ### What is required to carry out cost apportionment accurately? - [ ] No specific standard - [x] A basis of apportionment - [ ] External auditors - [ ] Seasonal survey > **Explanation:** A basis of apportionment is essential to ensure costs are fairly and accurately distributed among different cost centres. ### Which of these is generally NOT a basis of apportionment? - [ ] Square footage - [ ] Machine hours - [ ] Number of employees - [x] Revenue figures > **Explanation:** Revenue figures are not commonly used as a basis for cost apportionment; bases usually relate to space, usage, or headcount. ### Why is cost apportionment crucial for businesses? - [ ] To increase constant expenses - [ ] To eliminate indirect costs - [x] To fairly distribute shared indirect costs - [ ] To reduce the need for direct costs > **Explanation:** Cost apportionment allows businesses to fairly and consistently distribute shared indirect costs, ensuring accurate cost management. ### Which term is associated closely with cost apportionment? - [ ] Sales revenue - [ ] Direct costs - [x] Overheads - [ ] Intangible assets > **Explanation:** Overheads, or indirect costs, are closely associated with cost apportionment as they need to be appropriately distributed among cost centres. ### In which scenario is allocation preferred over apportionment? - [ ] When costs need to be shared - [ ] When costs are indirect - [x] When costs can be directly associated with a cost centre - [ ] When it’s the end of a fiscal year > **Explanation:** Allocation is preferred when costs can be directly identified and assigned to a specific cost centre. ### How is the basis of apportionment chosen? - [ ] Based on lowest cost - [ ] Random selection - [x] Based on fairness and relevance to cost centres/units - [ ] Highest earning centre > **Explanation:** The basis of apportionment is chosen based on the fairness and relevance to the cost centres or cost units that share the incurred costs. ### What is a cost centre? - [x] A department to which costs are allocated or apportioned - [ ] The place where revenues are generated - [ ] Non-profit part of a business - [ ] A tangible asset's recording mechanism > **Explanation:** A cost centre is an identifiable part of an organization, such as a department, to which costs are allocated or apportioned. ### What kinds of costs are typically apportioned? - [ ] Direct labor - [000x] Factory rent - [ ] Direct materials - [ ] Finished goods inventory > **Explanation:** Indirect costs like factory rent are apportioned, as they benefit multiple cost centres or units. ### How can apportionment affect financial reporting? - [ ] It misrepresents indirect costs - [ ] It hides actual costs - [x] It ensures a fair representation of costs in financial reports - [ ] It avoids documentation of costs > **Explanation:** Apportionment ensures that indirect costs are fairly represented, leading to more accurate and reliable financial reports.

Thank you for exploring the depth of apportionment in cost accounting and engaging with our targeted quiz questions to reinforce your understanding!

Tuesday, August 6, 2024
Appraisal
Apportionment
Cost Apportionment January 1, 1
Indirect Costs January 1, 1
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