The Principles of Apportionment of Overhead Costs in Cost Accounting

The determination of a suitable basis is of primary importance and the following principles are useful guides to a cost accountant:

Service or use or benefit derived:

If the service rendered by a particular item of expense to different departments, can be measured, overhead can be conveniently apportioned on this basis. Thus the cost of maintenance may be apportioned to different departments on the basis of machine hours or capital value of the machines, rent charges to be distributed according to the floor space occupied by each department.

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Ability to pay method:

Under this method, overhead should be distributed in proportion to the sales ability, income or profitability of the departments, territories, basis of products etc.

Efficiency method:

Under this method, the apportionment of expenses is made on the basis of production targets. If the target is exceeded, the unit cost reduces indicating a more than average efficiency. If the target is not achieved, the unit cost goes up, disclosing thereby, the inefficiency of the department.


Survey method:

In certain cases it may not be possible to measure exactly the extent of benefit which the various departments receive as this may vary from period to period. A survey is made of the various factors involved and the share of overhead costs to be borne by each cost center is determined. Thus the salaries of foreman serving two departments can be apportioned after a proper survey which may reveal that 30% of such salary should be apportioned to one department and 70% to the other department.


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