It is a method of charging overheads and expenses incurred during a specific period directly to the respective cost centre. It is used in management accounting to assess per unit cost in order to make the essential decisions regarding the production of goods. For instance, the cost of direct material is allocated to the cost centre of production directly or the cost of air conditioner which is used by a specific department will be charged to that department only.
In order to allocate the expenses to a specific cost centre, certain conditions must be fulfilled. First, the expenses should be related to the cost centre. Second, a reliable estimate of all the expenses can be made.
The allocation of expenses is very specific and you can only charge them if they are related to the cost centre. On the other hand, if the expenses are general in nature and cannot be allocated directly to a particular department, you will have to use another method to assess per unit cost.
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If an expense cannot be identified directly with any particular cost centre, the method of cost apportionment is used in management accounting. For example, the salary of a manager cannot be allocated to any cost centre as it is related to all the departments. Therefore, the manager’s salary will be charged to all the departments according the percentage of time which he has given to each department. The most common overheads which are apportioned include water, rent, bills and administrations salaries. The basis of apportionment of rent, water and utilities can be according to per square feet of area which is occupied by the departments.
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