Basis of Apportionment

Basis of Apportionment Cost Allocation Overhead Costs Cost Centres Equitable Cost Sharing Cost Accounting Allocation Base
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

### What is the primary reason for using a basis of apportionment? - [ ] To increase revenue - [x] To ensure fair and equitable distribution of costs - [ ] To decrease expenses - [ ] To simplify bookkeeping > **Explanation:** The primary reason for using a basis of apportionment is to ensure that shared costs are distributed fairly and equitably among different cost centers. ### What is a common basis of apportionment for rent? - [x] Floor area - [ ] Headcount - [ ] Number of machines - [ ] Production volume > **Explanation:** Floor area is commonly used as a basis of apportionment for rent because the space occupied by each department directly relates to how much rent they should incur. ### Can utilities be apportioned based on floor area? - [ ] No, it should only be based on headcount - [x] Yes, especially in the absence of usage meters - [ ] No, utilities cannot be apportioned at all - [ ] Only if approved by management > **Explanation:** Utilities can be apportioned based on floor area, especially if it is practical or no detailed usage data is available. ### Which of the following is least likely to be a basis of apportionment? - [ ] Floor area - [x] Favorite color of employees - [ ] Number of units produced - [ ] Machine hours > **Explanation:** The favorite color of employees is not a logical or relevant basis for apportionment as it has no correlation with cost distribution. ### Which term describes the method used to allocate shared costs among departments? - [ ] Depreciation - [ ] Capitalization - [x] Apportionment - [ ] Reconciliation > **Explanation:** Apportionment is the term used to describe the method of allocating shared costs among various departments or cost centers. ### Which basis could be used to apportion custodial services costs in a manufacturing plant? - [ ] Machine hours - [ ] Employee headcount - [x] Area cleaned (square feet) - [ ] Revenue > **Explanation:** Costs for custodial services would logically be apportioned based on the area cleaned, as it relates directly to the effort and resources required for cleaning. ### For insurance costs tied to high-value assets, which is a suitable basis of apportionment? - [x] Value of the assets - [ ] Number of employees - [ ] Production units - [ ] Revenue > **Explanation:** High-value insurance costs should be apportioned based on the value of the assets to reflect the insured risk appropriately. ### Why might headcount be used as a basis of apportionment for office supplies? - [ ] It measures the output - [x] It correlates with usage - [ ] It simplifies calculations - [ ] It directly relates to revenue > **Explanation:** Headcount is directly related to the usage of office supplies since more employees usually result in greater consumption of these supplies. ### What basis of apportionment might be used for distributing software costs in a technology company? - [ ] Square footage - [ ] Production output - [x] Number of software licenses used - [ ] Age of the employees > **Explanation:** The number of software licenses used is an appropriate basis for apportioning software costs as it reflects the actual usage. ### Which scenario would NOT require apportionment? - [ ] Allocating rent for a shared office space - [ ] Distributing HR costs across multiple departments - [ ] Charging direct materials to a product line - [x] Assigning wages to individual employees > **Explanation:** Assigning wages to individual employees does not require apportionment because this expense can be directly attributed to each employee without the need for any basis of distribution.

Thank you for exploring our detailed content on Basis of Apportionment and testing your knowledge with our quiz. Keep honing your expertise in cost allocation and accounting principles!

Tuesday, August 6, 2024
Basis of Assessment
Basis
Absorption Costing January 1, 1
Equitable Apportionment January 1, 1
ABC Method January 1, 1
Activity Measure in Activity-Based Costing January 1, 1
Allocation Base January 1, 1
Arbitrary Allocation January 1, 1
Cause-and-Effect Allocation January 1, 1
Cost Accounting January 1, 1
Cost Allocation January 1, 1
Cost Application January 1, 1

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