COST ACCOUNTING-Allocation and apportionment of overhead cost departmentalization process

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  1. Cost Allocation is the process of assignment of cost item to the cost object, which is directly traceable.
  2. Cost allocation helps you to avoid that and make decisions that are right for your company.
  3. With the surge in e-commerce activities, states have been actively reevaluating their approach to sales apportionment, particularly concerning digital transactions.
  4. For instance, in the apportionment of taxes among states or provinces, factors such as population, income, or sales may be used to determine the share of each jurisdiction.

Cost Allocation is the process of assignment of cost item to the cost object, which is directly traceable. On the other hand, cost apportionment is for those indirect cost items, which are leftover in the process of cost allocation. Because each state applies its own methods to calculate the taxes imposed on businesses that operate across state lines, the confusion can cause companies to underpay or overpay their tax bills.

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The term allocation of cost is concerned with the complete cost items, whereas the apportionment of the cost is all about the proportion of cost items. 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. Only income from assets kept primarily for investment purposes is subject to the allocation methods.

Difference Between Allocation and Apportionment in Tabular Form

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. The criteria used for allocation may vary across different decision-makers, leading to potential inequities or inefficiencies. It is crucial to establish transparent and objective criteria to ensure a fair and rational allocation process. To streamline your entire difference between allocation and apportionment state tax apportionment process, consider a comprehensive tool such as the Thomson Reuters ONESOURCE State Apportionment module. This web-based software solution can help you manage your data, consistently apply the right calculation methods, and provide a trackable solution for audits. With tools such as these, even the smallest tax team can stay on top of everything it needs to know to manage state income tax.

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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. Cost allocation is the process of assigning overhead cost to specific cost object or cost Centre where it is logical to do so especially when there exists a traceable cost object or Centre. The cost object can be a product, project, or batch of a product, a customer job or a production process.

Difference Between Allocation & Apportionment

In the early days of state tax apportionment laws, states did not include sales in the calculations, relying only on payroll and property. Over time, sales has become a more important factor in states’ apportionment calculations. Other types of companies, such as S (Subchapter) corporations, limited liability companies (LLCs), and partnerships usually do not need to pay corporate income tax. Instead, they are subject to “pass-through taxation“; the individuals involved in the business pay state tax on their income from the business, while the business doesn’t pay separately. Based on the relation of the cost item with the cost center or unit, to which it is imposed, the cost item is allocated or apportioned and not as per the nature of the expense. When costs are spread evenly among cost centres, the number of cost centres is utilized as the foundation for apportionment.

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.

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