Cost and Management Accounting · Overheads - Absorption Costing Method

Collection, Codification and Allocation of Overheads

Updated 4 October 2026 · Fact-checked

Overheads are indirect costs. You collect them from source documents, give each a code by nature and cost centre, and then allocate them. Allocation means charging an item wholly to one cost centre or cost unit because it clearly belongs there. Shared items are apportioned instead.

Understand Collection, Codification and Allocation of Overheads

Overheads are the indirect material, indirect labour and indirect expenses of a business. They cannot be traced to a single cost unit in an economical way. Rent, factory supervision, power and depreciation are common examples.

Collection is the first step. Overheads come from many source documents: stores requisitions for indirect materials, wage analysis sheets for indirect labour, and vendor bills and journal vouchers for expenses. Each item is recorded in the books and analysed by its nature, so the amount for each type of overhead is known for the period.

Codification gives each overhead a short code, usually letters or digits. One part of the code shows the nature of the expense and another shows the department or cost centre. For example, a code may identify indirect wages in the machining department. Codes cut down errors and wrong postings. They also make it easy to sort costs for control and reporting, and they let computerised systems post to the correct heading.

Allocation is the identification of a whole item of cost with a particular cost centre or cost unit. It applies when the cost is incurred only for that centre. The full amount is charged with no division. The salary of a supervisor who works only in the assembly department is allocated to assembly.

Allocation differs from apportionment. Apportionment divides an item among several cost centres on a fair basis, because the centres share the benefit. Rent of a common building is apportioned by floor area. So the test is simple: if the cost belongs to one centre, allocate it. If it is shared, apportion it.

Key rules to remember

Allocation: Allocated overhead = full amount of the cost identified with one cost centre; No basis or ratio is needed. Use it when the cost is incurred solely for that centre.
Apportionment (for contrast): Share of a centre = Total shared cost × (Centre's basis quantity ÷ Total basis quantity); Used for shared costs. For example, rent is shared on floor area and power on units consumed or kWh.
Test for treatment: One centre only → allocate; several centres → apportion; Write this test before you start any overhead distribution problem.
Check total: Sum of allocated items + Sum of shared items (before apportionment) = Total overhead collected. Sum of all centre totals after apportionment = Total overhead collected.; Count each shared item once, at its full amount, before it is split. After apportionment, its shares sit inside the centre totals, so never add the full shared cost and its shares together. Any difference means you missed or double-counted an item.

How to solve Collection, Codification and Allocation of Overheads questions

Use this method for any question that asks you to collect, code or allocate overheads, or to separate allocation from apportionment.

1List every overhead item given and note its amount. Total them so you have a control figure.
2For each item, ask whether it is incurred for one cost centre only or is shared by more than one.
3Allocate the items that belong to one centre. Put the full amount under that centre in your table.
4Choose a fair basis for each shared item, such as floor area, number of workers, kWh, machine hours or value of assets. Use only the basis the question gives or implies.
5Apportion shared items using the ratio of the basis. Show the ratio and the working for each item.
6Where the question asks for codes, build them in two parts: nature of expense and cost centre. State the logic of your scheme.
7Total each cost centre column, then check that the grand total equals the total overhead collected.

Quickest way: Table-first method for MCQs and written answers

When to use it: Use it when time is short and the question has several overhead items and several departments.

MCQs: read the words 'only', 'solely' or 'exclusively'. They usually signal allocation. Words like 'common', 'shared' or 'benefit' signal apportionment.
For a definition MCQ, eliminate options that mention dividing or sharing costs, as these describe apportionment.
For written answers, draw a table at once with items in rows and centres in columns, plus a total column.
Fill allocated items first, then apportioned items. Show the basis ratio beside each row, because step marks are given for the basis and the working.
Add a one-line check that column totals equal the total overhead, and write a brief conclusion on each centre's overhead.

Common mistakes in Collection, Codification and Allocation of Overheads

Treating allocation and apportionment as the same thing.
Both words describe charging overheads to departments, so they sound alike.
Fix: Remember that allocation is the whole cost to one centre and apportionment is a share to many. Use the one-centre or many-centres test.
Apportioning an item that is clearly for one department.
Students apply a ratio to every row out of habit.
Fix: Read the wording of each item first. If it names one department, allocate the full amount.
Using a wrong or unrelated basis for a shared cost.
Students pick the first basis in the question without matching it to the cost.
Fix: Match the basis to the benefit received. Use area for rent, kWh for power, and the number of employees for canteen costs.
Making a code that shows only the nature of the expense.
Students forget that the code must also identify where the cost belongs.
Fix: Build codes with two parts, nature and cost centre, and explain each part.
Leaving out an item or counting it twice, so totals do not tally.
There is no control total and no final check.
Fix: Total all overheads at the start and tally the table at the end.

Worked examples

Example 1

A factory has two production departments, Cutting and Finishing. Expenses for a month: indirect wages of Cutting ₹40,000; indirect wages of Finishing ₹30,000; depreciation of the Cutting machines ₹20,000; rent of the building ₹60,000; factory lighting ₹12,000. Floor area: Cutting 3,000 sq. ft, Finishing 2,000 sq. ft. Rent and lighting are both shared in the ratio of floor area. Show the allocation and apportionment and find the total overhead of each department.

Show the solution

Total overhead collected = 40,000 + 30,000 + 20,000 + 60,000 + 12,000 = ₹1,62,000.
Allocate: indirect wages of Cutting ₹40,000 and depreciation of Cutting machines ₹20,000 go to Cutting. Indirect wages of Finishing ₹30,000 go to Finishing.
Rent and lighting are shared. The basis is floor area, so the ratio is 3,000 : 2,000 = 3 : 2.
Apportion rent ₹60,000: Cutting = 60,000 × 3/5 = ₹36,000; Finishing = 60,000 × 2/5 = ₹24,000.
Apportion lighting ₹12,000: Cutting = 12,000 × 3/5 = ₹7,200; Finishing = 12,000 × 2/5 = ₹4,800.
Cutting total = 40,000 + 20,000 + 36,000 + 7,200 = ₹1,03,200.
Finishing total = 30,000 + 24,000 + 4,800 = ₹58,800.
Check: 1,03,200 + 58,800 = ₹1,62,000, which equals the total collected.

Answer: Cutting department overhead is ₹1,03,200 and Finishing department overhead is ₹58,800. The total of ₹1,62,000 agrees with the overhead collected.

Example 2

Design a simple code for overheads in a company that has three cost centres: Machining (code 10), Assembly (code 20) and Stores (code 30). Nature of expense codes: Indirect material 1, Indirect labour 2, Power 3. Write the code for (a) indirect labour of Assembly and (b) power of Machining. Explain why the code helps.

Show the solution

Decide the structure: code = cost centre code followed by nature code. This gives a clear two-part code.
(a) Cost centre Assembly = 20 and nature indirect labour = 2. The code is 20-2.
(b) Cost centre Machining = 10 and nature power = 3. The code is 10-3.
Each expense is posted under its code, so it reaches the right centre and the right type of overhead.
Purpose: the code prevents wrong postings, helps in sorting and totalling by centre or by nature, and supports comparison and control.

Answer: Indirect labour of Assembly is coded 20-2 and power of Machining is coded 10-3. The two-part code identifies both the centre and the nature of the cost, which reduces errors and helps control.

Exam tips

Write a one-line definition of allocation and apportionment together in theory answers, and state the difference in your own words.
In numericals, always show the basis and the ratio for each apportioned item. Marks are given for them even if arithmetic slips.
Underline words like 'solely', 'only' and 'common' in the question. They tell you how each item is treated.
Draw a clean table with a total row and check it against the total overhead. This avoids silly losses of marks.
For codification questions, give the structure of the code, one or two examples and the benefits. Keep it short and clear.

Practice questions from Overheads - Absorption Costing Method

Collection, Codification and Allocation of Overheads in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

CMA IntermediateCollection and Allocation of Overheads

Collection, Codification and Allocation of Overheads: frequently asked questions

What is the difference between allocation and apportionment of overheads?

Allocation charges the whole amount of an item to one cost centre or cost unit because it belongs only there. Apportionment divides an item among several cost centres on a fair basis because they share the benefit. Allocation needs no ratio, while apportionment does.

What is codification of overheads?

Codification is giving each overhead a code, made of letters or numbers, that identifies its nature and its cost centre. It reduces errors in recording and makes it easy to classify and total costs. It also supports computerised accounting and cost control.

How are overheads collected in cost accounting?

They are collected from source documents such as stores requisitions, wage sheets, bills and journal vouchers. Each item is analysed by its nature and recorded under its code. This gives the total of each type of overhead for the period.

How do I allocate overheads to cost centres in an exam question?

Check each item to see whether it relates to one cost centre only. If so, put the full amount in that centre's column. Apportion the remaining shared items on a suitable basis and check that the totals tally.