States must take steps to prevent unfair and unnecessary taxation when businesses operate across states. Allocation and apportionment are the two main strategies used by governments to calculate a company’s tax exposure. Allocation and apportionment are ways for allocating expenditures to their appropriate cost areas. Allocations are used whenever the entire spend is directly related to one department and when part of the spend is from more than one department.
Allocation vs Apportionment
The main difference between Allocation and Apportionment is that the Allocations are used when overhead can be traced back to a single department and cost center and should be used when the excess is spread across multiple departments. In Allocation, the entire cost is allocated to a department, while in Allocation, the cost proportion is distributed among its appropriate cost centers.
Whenever additional costs and expenses are allocated directly to a cost center, this is called cost allocation. For example, direct labor costs (including the price per unit of labor produced) are allocated to a single cost center, which in this case is the cost center associated with the manufacture of goods. Another example is that if one department uses an air conditioning unit independently, the entire cost of operating the air conditioning system will be given to that department.
When a certain expense cannot be precisely linked to a single cost center, cost apportionment is used. Any cost which does not belong to a specific sector but is shared by several sectors will be apportioned among such departments. Using the manager’s pay as an example, such an expenditure would have to be allocated based on a fair set of criteria. This may be anything like the manager’s time spent in each department as a proportion of his total time.
Comparison Table Between Allocation and Apportionment
| Parameters of Comparison | Allocation | Apportionment |
| Definition | The distribution of a costing item’s entire cost to cost centers or cost units. | The proportional allocation of overhead expenses to cost centers or cost units |
| Deals with | Deals with the entire cost item. | It only deals with the cost proportions of things. |
| Cost | The cost is assigned to a certain cost center or cost unit. | They are not allocated directly but are split or allotted to various departments on a reasonable basis. |
| Benefits | When a cost center consumes all of the expense’s advantages, it is said to be allocated. | When cost centers only use a fraction of the total expenses’ advantages, they are apportioned. |
| Base | For allocation, no bases are necessary. | A sufficient foundation is required. |
What is Allocation?
It’s a means of immediately allocating overhead costs and expenses incurred over a given period to the appropriate cost center. It is used in management accounting to calculate a unit cost to make important decisions about product production. For example, the cost of direct material is paid directly to the cost center of production, and the cost of an air conditioner used by a given department is charged specifically to that department.
Certain parameters must be met to allocate expenses to a certain cost center. To begin, the expenses must be linked to the cost center. Second, an accurate estimate of all costs may be created. Fees are allocated in a very specific way, and you can charge them if they are associated with a cost center. If, on the other hand, the expenses are of a generic character and cannot be assigned to a certain sector, you will need to use a different method to calculate per unit cost.
Allocation uses a formula to determine the average level of business revenue a company generates by operating within a given state. Salaries, gross sales, and other assets used to generate business-related income are all elements of the formula. Any revenue derived from intangible property – such as software design, graphic arts, or other creative works – that is a necessary part of the company’s daily operation is liable to apportionment taxation.
What is Apportionment?
When an expense cannot be directly linked to a certain cost center, management accounting employs the cost apportionment method. A manager’s wage, for example, cannot be assigned to any cost center because it affects all departments. As a result, the manager’s compensation will be charged to all departments based on the percentage of time he has spent in each.
Utilities, rent, bills, and administrative salaries are the most frequent overheads that are apportioned. Rent, water, and utility apportionment might be based on the number of square feet of the area occupied by the departments. The allocation method applies only to income from assets primarily used for investment purposes.
Dividend payments, interest payments, housing rents, publishing royalties, and other types of capital gains are examples of these assets. Allocation is also applicable to any other type of passive revenue that isn’t generated by a business. Does not include property used to conduct business operations, such as buildings or production facilities, as these are subject to property taxes in the state where the venue is located.
Main Differences Between Allocation and Apportionment
- The whole cost of a costing item is distributed to cost centers or cost units, whereas overhead expenses are allocated proportionally to cost centers or cost units.
- Allocation is responsible for the total cost component, whereas Apportionment only deals with objects’ cost proportions.
- A cost center or cost unit is assigned to the cost. They are not allotted directly to separate departments but are split or allotted to them on a reasonable basis.
- A cost center is considered to be allocated when it consumes all of the expense’s benefits. Cost centers are allocated when they only use a portion of the total expenses’ benefits.
- There are no bases required for allocation, whereas It is necessary to lay a solid foundation for apportionment.
Conclusion
The two accounting management approaches of allocation and apportionment are used to charge an organization’s overheads to its departments. Allocation is a method that is utilized when expenses may be charged directly to a certain department once a fair estimate of the amount has been made. Apportionment is used when fees cannot be allocated directly to anyone institution because they are generic in nature. Utility bills, for example, could be charged to only one department because the utilities benefit the entire organization.
References
- https://heinonline.org/hol-cgi-bin/get_pdf.cgi?handle=hein.journals/intaxjo4§ion=36
- https://heinonline.org/hol-cgi-bin/get_pdf.cgi?handle=hein.journals/intaxjo4§ion=7