Cost allocation is the process of identifying, aggregating and assigning costs to cost objects. A cost object is any activity or item for which you want to separately measure costs. Examples of cost objects are a product, a research project, a customer, a sales region, and a department.
Cost allocation is used for financial reporting purposes, to spread costs among departments or inventory items. Cost allocation is also used in the calculation of profitability at the department or subsidiary level, which in turn may be used as the basis for bonuses or the funding of additional activities. Cost allocations can also be used in the derivation of transfer prices between subsidiaries.
Apportionment of costs is the process of sharing a group’s expenditure among the individual funding streams/programmes being implemented. This process is generally used to cover central cost items such as salaries, general overhead, and ongoing running costs.
Cost apportionment occurs when a specific cost cannot be directly identified with one specific cost center. Any cost that does not belong to one department and is shared by a number of departments will be divided among these departments using apportionment.
Taking an example of the F&B manager’s salary, such as expense would have to be apportioned (between Bar, Banquet, Restaurant etc.) depending on fair criteria. This could be something like the percentage of the manager’s time taken up in each specific department. Other overheads that require apportionment include property rent, water and utility bills, general administration salaries, etc. Expenses such as rent, water and utilities can be fairly shared among departments by using a basis such as square feet per department space.