Allocation of Overheads:

- Allocation of overheads refers to the process of assigning indirect costs to specific cost centers or departments within an organization.
- It involves distributing the overall overhead costs among various departments or cost centers based on some predetermined basis, such as the number of employees, machine hours, or square footage.
- The purpose of allocation is to provide a fair and reasonable distribution of overhead costs among different departments, especially when these costs cannot be directly attributed to a specific department or product.

Absorption of Overheads:

- Absorption of overheads is the process of including all indirect costs into the cost of a product or service.
- It involves allocating the overhead costs to individual products or services based on a predetermined overhead absorption rate.
- The absorption rate is calculated by dividing the total overhead costs by a suitable cost driver, such as direct labor hours or machine hours.
- Once the absorption rate is determined, the overhead costs are assigned to each product or service by multiplying the absorption rate by the respective cost driver.

Apportionment of Overheads:

- Apportionment of overheads refers to the process of dividing indirect costs among different cost centers or departments based on their relative usage or benefit.
- It involves distributing the common overhead costs that cannot be directly attributed to a specific department in a fair and equitable manner.
- The apportionment is based on a suitable basis, such as the proportion of direct labor cost, machine hours, or square footage used by each department.
- The objective of apportionment is to allocate the common overhead costs according to the actual utilization or benefit derived by each department.

Key Differences:

- Allocation is the process of assigning overheads to specific departments or cost centers, whereas absorption involves including all overheads into the cost of a product or service.
- Allocation is based on a predetermined basis, while absorption uses a predetermined overhead absorption rate.
- Allocation distributes overheads among different departments, whereas absorption assigns overheads to individual products or services.
- Apportionment is the process of dividing common overhead costs among different departments based on their relative usage or benefit.
- Allocation and apportionment are used when overhead costs cannot be directly attributed to a specific department, while absorption is used when assigning overheads to products or services.