States must adopt measures to prevent unfair and excessive taxation when enterprises operate over state lines. Allocation and apportionment are the two basic strategies used by states to calculate a company's tax exposure. "allocation" refers to designating non-business revenue to a specific state or municipal tax authority. Apportionment is a method for allocating corporate income among states.
Departmentalization is creating departments in an organization, such as machining, people, fabrication, maintenance, stores, accounts, etc., to efficiently allocate and apportion overheads. The phrase cost allocation refers to the total cost items, whereas cost apportionment refers to the proportion of cost items.
The cost item is assigned or apportioned based on its relationship to the cost centre or unit to which it is imposed, not on the nature of the expense.
Apportionment vs Allocation
Allocation and apportionment are two ways of allocating expenditures to their appropriate cost areas. When the entire expense is directly tied to one department, allocation is utilized, and apportionment is used when proportions of the expense come from several departments. The article provides a detailed explanation of these terminologies with examples and compares these cost-assignment strategies. Allocation and apportionment are strategies for dividing costs among different cost centres based on which department or cost centre each cost or component of a cost belongs to.
Difference Between Allocation and Apportionment in Tabular Form
|Parameters of comparison
|The total distribution of the overhead item to the departments is referred to as cost allocation.
|The distribution of various overhead items in proportion to the department is referred to as cost allocation.
|The expenses are allocated directly to various departments.
|The expenses are proportionately distributed to various departments.
|The expenses incurred in a particular department are allocated to that particular department.
|The costs are incurred in two or more departments on bases
|The entire expenditure is distributed to that particular department.
|The total expenditures are divided among the departments equally.
|Its made if the expenditure is related to a particular department.
|Its made if the expenditure is related to various departments.
|No base is required to include a particular department.
|The expenses are distributed among the departments on equitable bases.
|It denotes the part of cost attribution where a specific cost is assigned to a cost unit.
|It denotes the element of cost attribution that distributes costs among numerous cost units according to the projected benefit.
|Salary of employees will be allocated to the HR department, and raw materials expenses will be allocated to the production department etc.
|Expenses like rent and electricity will be apportioned between production and service departments.
What Is Allocation?
The direct assigning of cost to the traceable cost object is cost allocation. It is the process of assigning expenses to various divisions within a company. When a cost item is easily associated with a cost unit, such as a product or a cost centre, the costs are charged to the appropriate cost centre or unit, and the process is known as cost allocation. It is reasonable to distribute an overhead item to a department in more technical terms.
- For example, direct labour costs (such as labour cost per unit produced) are allocated directly to a specific cost centre, which in this case will be a cost centre associated with product manufacturing.
- Another example is if one department uses an air conditioning unit independently, the total expense of operating the air conditioner will be given to that department.
- For example, Salary provided to maintenance department personnel can be attributed to that department.
To be assigned an overhead, several conditions must be met. The cost centre must have created the expense, and the exact amount of the expense or overhead must be known. As a result, cost allocation refers to a process in which the entire cost of an item is charged to the appropriate cost centre. The following are the two factors that influence cost allocation:
- Overhead is incurred because of the cost unit or cost centre in question.
- Costs must be estimated in a precise quantity.
Only income from assets kept primarily for investment purposes is subject to the allocation methods. Stock dividends, loan interest, property rents, publishing royalties, and other capital gains are examples of these assets. The allocation also applies to any other type of passive revenue that isn't generated by a business. It does not cover property used to perform company operations, because those are subject to property taxes in the home state of the site.
Importance Of Allocation
- Aides to know the cost of the specific department.
- Helps in decision making for the company regarding costing.
- It helps in reducing the cost of the product.
- It helps to determine each department's cost requirement and profitability.
What is apportionment?
When cost items cannot be directly attributed to or reliably traced to a specific cost centre, they are prorated among several cost objects on an equitable basis, a procedure known as cost apportionment. It is the proportional allocation of various cost items to the cost unit or cost centre properly. In simple terms, apportionment is spreading unallowable expenses across various departments.
Cost apportionment is used when an unavoidable expense cannot be precisely linked to a single cost centre. Any expenditure that does not belong to a single department but is shared by several departments will be apportioned among these departments. Using the manager's pay as an example, such an expense would have to be allocated based on a fair set of criteria. Property rent, water and utility costs, general administration wages, and other overheads require apportionment. Rent, water, and utility costs can be appropriately split among departments by employing a square foot per department space basis.
For example, if wages given to the factory's head, factory rent, power, and other expenses cannot be assigned to a specific department, they can be distributed across multiple departments.
After a thorough evaluation of the link between the base and various factors, the basis for cost apportionment is established. It's critical to plan ahead of time for an adequate apportionment basis that ensures each department gets a fair share of typical overheads. To improve accuracy, the base should be checked regularly.
It is founded on the following fundamentals:
- Finished the job
- Methodology of investigation or analysis
Principles of apportionment
The rules for determining an appropriate foundation for allocating overhead expenses are outlined below.
According to this approach, the allocation of everyday overhead items should be based on the actual benefit obtained by the various cost centres. When the actual benefits are quantifiable, this strategy can be used.
Rent, for example, can be allocated depending on the amount of floor space occupied by each department.
According to this idea, everyday overhead items should be allocated according to possible advantages (i.e., benefits likely to be received). This strategy is used when determining actual benefits is difficult, impossible, or cost-prohibitive.
The cost of a canteen, for example, can be divided according to the number of employees in each department, which is a possible benefit.
According to this approach, overheads should be allocated depending on the departments' potential to sell or generate revenue.
Method of Efficacy
According to this approach, The allocation of overhead expenses should be established based on output targets. The unit cost reduces when the objective is raised, demonstrating increased efficiency. However, if the goal isn't met, the unit cost rises, showing inefficiency within the department.
Method for determining specific criteria
According to this idea, the allocation of overhead expenses is based on criteria obtained through a survey. As a result, the survey approach is called the specified criteria method. When other approaches fail to provide a suitable basis, it is worthwhile to employ the survey method. When allocating a foreman's compensation.
For example, a thorough survey would determine how much time and attention the foreman devotes to various departments. The apportionment is based on the results of the poll.
When costs are spread evenly among cost centres, the number of cost centres is utilized as the foundation for apportionment. This occurs when an overhead cannot be directly ascribed to a single cost centre.
For example, individual cost centres may pay rent and business rates, and floor space may be used as a foundation for apportionment to split costs among appropriate cost centres. When the overhead belongs to several departments, the expenditures are proportionately apportioned. In layman's terms, expenses that can't be charged to a single department are spread among numerous departments.
The Uniform Income Division for Tax Purposes Act (UIDITA) was enacted to make it easier for people to divide their income.
Because each state has its methodology to calculate the taxes levied on enterprises that operate across state lines, the resulting misunderstanding can lead to underpayment or overpayment of tax bills. The Uniform Division of Income for Tax Purposes Act was enacted to meet the demand for a consistent dividing of income for tax purposes among the numerous state and local taxing agencies. The law defines the distinction between business and non-business income and specifies which income sources should be taxed under allocation and apportionment.
The Multistate Tax Commission is tasked with enforcing.
According to the Uniform Law Commission, the Multistate Tax Commission's mission is to promote and maintain consistency in interstate commerce taxation. The MTC contains the Uniformity Committee, which operates as an enforcement arm for the Uniform Division of Income for Tax Purposes Act. The Uniformity Committee's aims for producing consistent techniques for the income taxation of interstate trade include adopting simple, fair and dependable standards for allocation and apportionment and fostering more fantastic communication between enterprises and state taxing bodies. The Multistate Tax Commission is tasked with enforcing.
Key differences between allocation and apportionment in points
On the following basis, the distinction between allocation and apportionment can be drawn:
- A method in which the entire amount of overhead is charged to a given cost centre is known as cost allocation. On the other hand, apportionment of cost can be defined as the distribution of proportions of cost components to the cost unit, such as a product or service or a cost centre.
- It can be allocated only when a cost is identified as particularly imputable to a specific cost centre. When a cost cannot be allocated to a specific cost centre, apportionment of the cost is required. Instead, the expense is split amongst two or more cost centres, depending on the predicted benefit.
- Because overhead allocation is essentially a departmentalization of expenses, the overheads are allotted to the department directly. On the other hand, cost apportionment entails the proportionate distribution of costs to other departments justifiable.
- When overhead is associated with a specific department, cost allocation is used. On the other hand, cost apportionment is used when overhead is spread over multiple departments.
- Allocation and apportionment are cost-distribution procedures that divide costs among several cost centres based on which department or cost centre each cost or piece of a cost belongs to.
- The main distinction between allocation and apportionment approaches is that allocation is used when overhead can be traced back to a single department and cost centre. In contrast, apportionment is used when overhead is spread over multiple departments.
- In allocation, the entire cost will be allotted to one department. However, the cost will be divided into proportions in apportionment and distributed among their appropriate cost centres.
- Because the expense will be directly tied to one cost centre, allocating it is easier and simpler. However, the apportionment can be challenging since determining what expense percentage should be allocated to each department might be problematic.
Both cost allocation and cost apportionment have the same goal of identifying and assigning costs to cost centres, but they are not the same. Cost Allocation is assigning a cost item to a directly traceable cost object. On the other hand, cost apportionment is for the indirect cost items left over after the cost allocation procedure.