Basis of Apportionment

The basis used for the equitable apportionment of costs between several cost centres when direct assignment is not feasible.
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Basis of Apportionment in Accounting

Basis of Apportionment is the standard or metric used to distribute or share costs among multiple cost centers equitably. This concept is crucial when the cost, such as overhead, cannot be directly attributed to a single cost center. For instance, general expenses like rent, utilities, and depreciation need a systematic basis for allocation across different departments to ensure fair sharing of costs.

Examples

  1. Rent and Business Rates: Often, floor area may be used as a basis to distribute rent and business rates among various departments or cost centers. For example, if Department A occupies 60% of the floor space, it will bear 60% of the rental cost.

  2. Utilities: Electricity charges could be apportioned based on the number of electrical devices or machinery used by different departments.

  3. Insurance: Premiums for insurance might be allocated based on the value of assets or inventory each department holds.

Frequently Asked Questions

1. What is the difference between an allocation base and a basis of apportionment?

An allocation base is a predetermined metric—such as machine hours or labor hours—used for assigning costs to cost centers. Meanwhile, the basis of apportionment is a broader term that might involve square footage, revenue, or headcount, tailored to fit specific overhead distribution needs.

2. Why is the basis of apportionment important?

It ensures a fair and transparent distribution of shared costs among various departments, promoting accurate financial reporting and decision-making.

3. How is the basis of apportionment selected?

The selection is based on the nature of the expense and the logical relationship between the expense and the activities or resources of the cost centers. For example, utilities would more logically be apportioned based on energy use than floor area.

  • Cost Centres: Departments or units within an organization where costs are collected and assigned.
  • Overhead Costs: Ongoing expenses not directly tied to producing a good or service. These include rent, utilities, and administrative salaries.
  • Allocation Base: A measure, such as labor hours or machine hours, that is used for allocating overhead costs to products or services.

Online Resources

  1. Investopedia: Various articles and tutorials on cost allocation and accounting principles.
  2. Coursera: Courses on cost accounting and financial management.
  3. LinkedIn Learning: Professional courses on accounting and cost management.

Suggested Books for Further Studies

  1. “Cost Accounting: A Managerial Emphasis” by Charles T. Horngren
  2. “Managerial Accounting” by Ray H. Garrison, Eric W. Noreen, and Peter C. Brewer
  3. “Principles of Cost Accounting” by Edward J. Vanderbeck and Maria R. Mitchell

Accounting Basics: “Basis of Apportionment” Fundamentals Quiz

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