- How is a primary proration done?
- -Primary apportionment principles
- Derivative service or benefit
- Ability to pay method
- Efficiency method
- Survey method
- Differences with the secondary
- Secondary proration
- Examples of primary apportionment
- Bases for apportionment of factory overhead
- ABC Company
- References
The primary assessment is the allocation of proportions of elements of cost centers or cost units on an equitable basis of the estimated benefit received. The term refers to the allocation of expenses that cannot be fully identified with a particular department.
This process of distribution is also known as departmentalization of indirect costs. It should be noted carefully that, when making primary apportionment, it is ignored to make a distinction between production and service departments.
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A company is administratively divided into departments, in order to operate smoothly and efficiently. This subdivision is made in such a way that each department represents a division of the company's activity, such as the maintenance department, the warehouse department, the cost department, etc.
The primary apportionment of indirect costs to the respective departments facilitates the control of overhead costs through budgets. It also facilitates the control of the use that is given to the services provided to the respective departments.
How is a primary proration done?
-Primary apportionment principles
Determining a suitable base is of primary importance. Therefore, the following principles are useful guides for a cost accountant.
Derivative service or benefit
If the service provided by a particular item of expense to different departments can be measured, the overhead can be conveniently prorated on this basis.
Therefore, the maintenance cost can be prorated to the different departments based on the machine hours or the value of the machines, the rental charges will be distributed according to the space occupied by each department, etc.
Ability to pay method
Under this method, indirect expenses are distributed in proportion to the sales capacity, income or profitability of the departments, territories, product base, etc.
Therefore, the jobs or products that make the most profits will take a greater share of the overhead.
This method is not fair, as it is generally not advisable to subsidize inefficient units at the expense of efficient units.
Efficiency method
Under this method, the apportionment of expenses is made on the basis of production targets. If the target is exceeded, the unit cost is reduced, indicating above-average efficiency.
If the objective is not achieved, the unit cost increases, thus revealing the inefficiency of the department.
Survey method
In certain cases, it may not be possible to accurately measure the extent of benefits that different departments receive, as this may vary from period to period. To solve this, a survey of the various factors involved is carried out and the portion of indirect costs that each cost center must cover is determined.
Therefore, the salary of the supervisor who serves two departments can be assigned after a proper survey, which may reveal that 30% of that salary should be assigned to one department and 70% to the other department.
Differences with the secondary
The primary apportionment process occurs when indirect expenses are distributed to all departments of the organization, both production and service departments, without considering any mutual transfer of benefits.
The objective in this stage is to allocate the common overheads to all cost centers that have benefited from that expense, using fair or equitable bases.
The next step is to transfer the overhead from the non-production departments to the production departments, as the various cost centers move solely through the production departments.
Secondary proration
The secondary apportionment stage redistributes the overhead from the service department to the production departments.
The goal of this stage is to ensure that only production departments bear all indirect costs, which will eventually be charged to products.
This is because while there is a direct link between the product produced and the production departments, there is no such link between the products and the service departments.
The absence of a direct link between the service cost centers and the products will make it difficult to load the indirect costs from the service cost centers to the products. This stage is also called indirect cost redistribution.
Service departments are those departments such as administration, stores, dining room, maintenance, etc. that are not directly involved in the production process. They provide a support job to the production departments.
Examples of primary apportionment
Bases for apportionment of factory overhead
For the purpose of performing the primary apportionment, a summary of the departmental distribution should be prepared as follows:
- Rent, fees and taxes, building depreciation, heating, cost of building repair, cleaning, etc. Basis for apportionment: Land area occupied by each department.
- Illumination. Basis for apportionment: Number of light points, illuminated area.
- Expended electrical energy. Basis for apportionment: Kilowatt hours.
- Plant and machinery insurance, plant and machinery depreciation, plant and machinery maintenance. Basis for apportionment: Book value of the asset or acquisition cost.
- Insurance of tools and accessories, energy, repairs and maintenance costs, etc. Basis for apportionment: Direct labor hours or machine hours.
- Subsidies or expenses for dining, pensions, medical expenses, expenses of the personnel department, cost of recreational facilities, expenses of the salary department, supervision costs. Basis for apportionment: Number of employees or salaries paid.
ABC Company
Suppose that company ABC has to pay a total rent of $ 5,000 for its facilities. The area of land occupied by each department is chosen as the base of the primary apportionment of this indirect cost:
- The area of department A is 100 square meters.
- Area of department B is 200 square meters.
- The area of department C is 700 square meters.
Based on these occupied areas, it can be stated that the total proportion of departments A, B and C is then 10%, 20% and 70%, respectively. So:
- Total rental expense for apartment A = (5,000) x 10% = $ 500.
- Total rental cost of apartment B = (5,000) x 20% = $ 1,000.
- Total rental expense for department C = (5,000) x 70% = $ 3,500.
From the example above, it is clear that the total overhead costs will be distributed to different departments in different ways. The base of apportionment of the rent is the area of the apartment.
References
- Pushpender Pal (2019). Apportionment of Overheads - Cost Accountancy. Accounting Notes. Taken from: accountingnotes.net.
- Chester Morton (2016). Primary and secondary apportionment of overheads. Virtual Kollage. Taken from: virtualkollage.com
- Ashish Lodha (2019). Allocation and Apportionment of Overhead to Cost Centers. Your Article Library. Taken from: yourarticlelibrary.com.
- Wikipedia, the free encyclopedia (2019). Total absorption costing. Taken from: en.wikipedia.org.
- Rashid Javed (2019). Apportionment of overhead expenses. Play Accounting. Taken from: playaccounting.com.