Allocation, apportionment, and absorption of overheads are the processes involved in calculating and assigning indirect costs to products, services, or departments. These processes are critical in determining the true cost of production or service delivery, and they help in setting prices and making informed business decisions.

Allocation of Overheads:
Allocation refers to the process of assigning a portion of the total overhead cost to a particular cost center or department. This is done when the overhead cost cannot be directly traced to a specific product, service, or process. The allocation process involves identifying the cost drivers, which are the activities or events that cause the overhead costs to be incurred. The cost drivers are then used to allocate the overhead cost to the relevant cost centers or departments.

Apportionment of Overheads:
Apportionment is the process of distributing the overhead cost that cannot be directly attributed to a specific cost center or department. This is done based on some criteria such as the usage of floor space, number of employees, machine hours, or any other relevant factor that can be used to apportion the overhead cost. The apportionment process ensures that the overhead cost is allocated fairly to all the departments that benefit from the use of the overhead resources.

Absorption of Overheads:
Absorption is the process of including the overhead cost in the total cost of the product or service. This is done by adding the allocated or apportioned overhead cost to the direct cost of the product or service. The absorption rate is calculated by dividing the total overhead cost by the total direct cost. Once the absorption rate is determined, it can be used to calculate the cost of each product or service by multiplying the absorption rate by the total direct cost of the product or service.

Conclusion:
In conclusion, allocation, apportionment, and absorption of overheads are crucial in determining the true cost of production or service delivery. These processes help in setting prices, making informed business decisions, and ensuring that the overhead cost is allocated fairly to all the departments that benefit from the use of the overhead resources.