Final answer:
Apportionment is used to distribute costs from service cost centres to production cost centres in an equitable manner, reflecting the actual usage of services by the production areas. It is essential for accurate product costing, pricing, and profitability analysis in business.
Step-by-step explanation:
Apportionment in a business setting refers to the method used to allocate the costs incurred by service cost centres to the production cost centres. This process is applied when a business wants to accurately assess the costs associated with producing goods or services. Service cost centres are departments that do not engage directly in production activities but provide essential support services to production cost centres, such as maintenance, security, or janitorial services. Apportionment is used because it allows for a more precise assignment of overhead costs based on the relative benefits received by the production departments.
The apportionment of costs is typically carried out using a variety of allocation bases that reflect the extent to which each production cost centre has utilized the services provided. Common bases for apportionment include floor area occupied, machine hours used, direct labor hours, or energy consumption. The goal is to distribute the service costs in a manner that is both equitable and reflects the actual usage of each production centre.
For example, if a maintenance department services various production lines, the costs of maintenance would be shared between them. If one line uses the maintenance services twice as much as another, the costs could potentially be apportioned based on the service usage. Other methods of apportionment might include using a predetermined rate, a percentage of direct costs, or the number of employees in each production cost centre.
The importance of accurate cost apportionment lies in the impact it has on product pricing, profitability analysis, and financial decision-making. An equitable apportionment ensures that each production cost centre is only charged for the services it utilizes, leading to a more precise calculation of product costs and ultimately helping management in budgeting and performance evaluation.