3.3 Overhead Allocation, Apportionment, and Reapportionment
Key Takeaways
- Allocation charges complete items of indirect expenditure directly to a single cost centre when incurred exclusively by that centre.
- Apportionment splits shared overhead costs across multiple cost centres using fair bases (e.g., floor area for rent, machine value for depreciation).
- Secondary reapportionment redistributes service department costs (maintenance, canteen) to production cost centres.
- Reciprocal services between service departments are reapportioned using the Direct Method, Step-Down Method, or Repeated Distribution Method.
- The Overhead Analysis Sheet (OAS) systematically combines allocation, primary apportionment, and reapportionment to establish final production cost totals.
3.3 Overhead Allocation, Apportionment, and Reapportionment
Indirect production costs (factory overheads) cannot be traced directly to individual cost units. To ensure that product costs accurately reflect the total resources consumed during manufacturing, management accountants distribute factory overheads across cost centres in a systematic three-step process: Allocation, Primary Apportionment, and Secondary Reapportionment using an Overhead Analysis Sheet (OAS).
The Three Stages of Overhead Distribution
TOTAL FACTORY OVERHEADS
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+----------------------------------------+----------------------------------------+
| |
v v
1. ALLOCATION 2. PRIMARY APPORTIONMENT
Whole cost items charged directly to a cost centre Shared costs split across centres using bases
(e.g., Canteen supervisor salary -> Canteen) (e.g., Factory rent split by Floor Area sq m)
| |
+----------------------------------------+----------------------------------------+
|
v
3. SECONDARY REAPPORTIONMENT
Service Dept overheads reapportioned to Prod Depts
(e.g., Maintenance costs transferred to Machining & Assembly)
Stage 1: Overhead Allocation
Allocation is the process of charging an entire, identifiable item of indirect cost directly to a specific cost centre, because that cost was incurred exclusively by or within that cost centre.
- Examples: Salary of the Maintenance Manager allocated to Maintenance Cost Centre; Canteen food supplies allocated to Canteen Cost Centre; Machining oil allocated to Machining Cost Centre.
Stage 2: Primary Overhead Apportionment
Apportionment is the process of dividing shared indirect costs across multiple production and service cost centres using an equitable basis that reflects the benefit received by each centre.
Standard Bases of Apportionment
| Overhead Cost Item | Recommended Basis of Apportionment |
|---|---|
| Factory Rent, Rates, Heating, Lighting, Building Insurance | Floor Area ($m^2$ or $sq ft$) occupied by each cost centre |
| Machine Depreciation, Machinery Insurance | Cost / Book Value of machinery in each centre |
| Canteen Costs, Personnel Dept, First Aid, Welfare | Number of Employees / Headcount in each centre |
| Electric Power for Machinery | Kilowatt-Hours (kWh) or Machine Capacity ($HP \times \text{hours}$) |
| Storekeeping / Materials Handling Costs | Number of Material Requisitions or Quantity of Materials Consumed |
| Supervisors' Salaries (Shared) | Number of Direct Workers or Direct Labour Hours |
Stage 3: Secondary Reapportionment of Service Department Overheads
Service departments (e.g., Factory Maintenance, Canteen, Stores) support production departments but do not manufacture goods directly. Therefore, their accumulated overheads must be reapportioned to production cost centres (such as Machining and Assembly) so that production departments bear the full cost of manufacturing.
Reapportionment Methods
- Direct Method: Ignores any work service departments perform for each other and reapportion service department costs exclusively to production cost centres.
- Step-Down Method: Reapportions service department costs sequentially, starting with the service department that provides services to the greatest number of other service departments. Once a service department's costs are reapportioned, no costs are allocated back to it.
- Repeated Distribution Method: Handles reciprocal services (where service departments serve each other) by repeatedly reallocating remaining balances until amounts become negligible.
Worked Numerical Example: Complete Overhead Analysis Sheet (OAS)
Scenario: Apex Manufacturing has two production departments (Machining and Assembly) and two service departments (Maintenance and Canteen). The overheads and operational parameters for July are:
-
Directly Allocated Overheads: Maintenance Dept salaries £6,000; Canteen Dept supplies £4,000.
-
Shared Overheads to Apportion:
- Factory Building Rent & Rates: £20,000
- Machine Depreciation: £12,000
- Factory Staff Welfare: £5,000
-
Departmental Parameters:
| Parameter | Machining | Assembly | Maintenance | Canteen | Total |
|---|---|---|---|---|---|
| Floor Area ($m^2$) | 4,000 | 3,000 | 2,000 | 1,000 | 10,000 |
| Machine Book Value (£) | £150,000 | £30,000 | £20,000 | £0 | £200,000 |
| Number of Employees | 25 | 45 | 10 | 5 | 85 |
| Maintenance Hours Used | 600 hrs | 200 hrs | - | - | 800 hrs |
Step-by-Step Apportionment Calculations
- Rent (£20,000): Apportioned by Floor Area ($10,000 m^2$ total $\rightarrow \pounds 2/m^2$).
- Machining: $4,000 \times 2 = \pounds 8,000$; Assembly: $3,000 \times 2 = \pounds 6,000$; Maint: $2,000 \times 2 = \pounds 4,000$; Canteen: $1,000 \times 2 = \pounds 2,000$.
- Machine Depreciation (£12,000): Apportioned by Machine Value (£200,000 total $\rightarrow 6%$ of value).
- Machining: $150,000 \times 6% = \pounds 9,000$; Assembly: $30,000 \times 6% = \pounds 1,800$; Maint: $20,000 \times 6% = \pounds 1,200$; Canteen: £0.
- Staff Welfare (£5,000): Apportioned by Employee Count (85 total $\rightarrow \pounds 58.8235/emp$).
- Machining: $25 \times 58.8235 = \pounds 1,471$; Assembly: $45 \times 58.8235 = \pounds 2,647$; Maint: $10 \times 58.8235 = \pounds 588$; Canteen: $5 \times 58.8235 = \pounds 294$.
Primary Apportionment Summary Table
| Overhead Cost | Basis | Machining (£) | Assembly (£) | Maintenance (£) | Canteen (£) | Total (£) |
|---|---|---|---|---|---|---|
| Allocated Salaries/Supplies | Direct | £0 | £0 | £6,000 | £4,000 | £10,000 |
| Factory Rent | Floor Area | £8,000 | £6,000 | £4,000 | £2,000 | £20,000 |
| Machine Depreciation | Machine Value | £9,000 | £1,800 | £1,200 | £0 | £12,000 |
| Staff Welfare | Employees | £1,471 | £2,647 | £588 | £294 | £5,000 |
| PRIMARY TOTALS | £18,471 | £10,447 | £11,788 | £6,294 | £47,000 |
Step-Down Secondary Reapportionment
-
Step A: Reapportion Canteen (£6,294) based on employees in remaining depts (Machining 25, Assembly 45, Maintenance 10 = 80 total $\rightarrow \pounds 78.675/emp$).
- Machining: $25 \times 78.675 = \pounds 1,967$; Assembly: $45 \times 78.675 = \pounds 3,540$; Maint: $10 \times 78.675 = \pounds 787$.
- Maintenance subtotal after Canteen reapportionment = $\pounds 11,788 + \pounds 787 = \mathbf{\pounds 12,575}$.
-
Step B: Reapportion Maintenance (£12,575) based on Maintenance Hours (Machining 600 hrs, Assembly 200 hrs = 800 total hrs $\rightarrow$ Machining 75%, Assembly 25%).
- Machining: $75% \times 12,575 = \pounds 9,431$; Assembly: $25% \times 12,575 = \pounds 3,144$.
Final Overhead Analysis Sheet Totals
| Line Item | Machining (£) | Assembly (£) | Maintenance (£) | Canteen (£) |
|---|---|---|---|---|
| Primary Apportionment Subtotals | £18,471 | £10,447 | £11,788 | £6,294 |
| Reapportion Canteen | +£1,967 | +£3,540 | +£787 | -£6,294 |
| Reapportion Maintenance | +£9,431 | +£3,144 | -£12,575 | £0 |
| FINAL PRODUCTION OVERHEAD TOTALS | £29,869 | £17,131 | £0 | £0 |
AAT Exam Traps
Exam Trap 1 — Allocating Direct Costs to OAS: Only INDIRECT overheads are included on an Overhead Analysis Sheet. Direct material and direct labour are charged directly to cost units and must be excluded from OAS primary apportionment.
Exam Trap 2 — Reapportionment Base Order: In the Step-Down method, always start by closing the service department that serves the greatest number of other service departments. Once closed, never allocate any costs back to it!
Which basis of apportionment is most appropriate for sharing factory building rent (£40,000) across production departments?
What is the key difference between overhead ALLOCATION and overhead APPORTIONMENT?
Why must service department overheads (such as Maintenance and Canteen) be secondary-reapportioned to production departments?
Which service department reapportionment method sequentially transfers costs without allocating costs back to previously closed service departments?