Apportionment
Apportionment is a method of allocating or dividing a given value, such as costs, revenues, or resources, among different segments, departments, or individuals within a business or organization. The goal of apportionment is to distribute the value fairly and accurately, typically based on an agreed-upon basis or criteria, ensuring that each segment or individual bears an appropriate share of the overall value.
In accounting, apportionment is often used to allocate indirect costs, such as overhead or administrative expenses, to various cost centers or departments based on relevant allocation bases like labor hours, machine hours, or floor space. This helps businesses determine the true costs of their products or services and make informed decisions about resource allocation, pricing, and budgeting.
Example of Apportionment
Let’s say a company operates three departments: Manufacturing, Sales, and Marketing. The company has a total of $300,000 in indirect costs for a given year, which need to be allocated among the three departments. The company decides to apportion the indirect costs based on each department’s labor hours, as shown below:
- Manufacturing Department: 15,000 labor hours
- Sales Department: 5,000 labor hours
- Marketing Department: 10,000 labor hours
Total labor hours for the company: 15,000 + 5,000 + 10,000 = 30,000 labor hours
Now, we’ll allocate the $300,000 indirect costs to each department based on their labor hours:
- Manufacturing Department: (15,000 labor hours / 30,000 total labor hours) * $300,000 = $150,000
- Sales Department: (5,000 labor hours / 30,000 total labor hours) * $300,000 = $50,000
- Marketing Department: (10,000 labor hours / 30,000 total labor hours) * $300,000 = $100,000
After the apportionment, the Manufacturing Department is allocated $150,000 of indirect costs, the Sales Department is allocated $50,000, and the Marketing Department is allocated $100,000. This allocation helps the company understand the true costs associated with each department and allows for more accurate budgeting, decision-making, and performance evaluation.
