Allocation, Apportionment and Absorption are three methods of costing. Which statement correctly defines allocation?

Allocation, Apportionment and Absorption are three methods of costing. Which statement correctly defines allocation?

• A. Allocation is where overhead costs cannot be identified and are shared between departments.
• B. Allocation is where overhead costs can be specifically identified and charged to a particular department.
• C. Allocation is the process of recovering overheads in production by using an absorption rate.
• D. Allocation is when costs are charged to cost units.

Answer: (B)

Allocation means charging overhead costs to a department when those costs can be directly traced to that specific department. Think of costs that clearly belong to one area, such as the salary of a supervisor who works only for that department or rent for premises used solely by that department. Because these costs can be identified with a particular department, they are allocated to that department’s cost center. This approach is different from apportionment, which deals with shared overheads that must be divided among departments on a fair basis, and from absorption, which applies overheads to production or cost units using an rate. Charging costs to cost units is part of absorption, not allocation.

Allocation means charging overhead costs to a department when those costs can be directly traced to that specific department. Think of costs that clearly belong to one area, such as the salary of a supervisor who works only for that department or rent for premises used solely by that department. Because these costs can be identified with a particular department, they are allocated to that department’s cost center.

This approach is different from apportionment, which deals with shared overheads that must be divided among departments on a fair basis, and from absorption, which applies overheads to production or cost units using an rate. Charging costs to cost units is part of absorption, not allocation.