Cost Accounting · Overheads

Collection and Allocation of Overheads in Cost Accounting

Updated 10 October 2026 · Fact-checked

Collection gathers overhead costs from bills, vouchers and ledgers under proper codes. Allocation is charging the whole amount of an overhead item directly to the one cost centre or cost unit that caused it, with no sharing. Items used by several centres are apportioned, not allocated.

Understand Collection and Allocation of Overheads

Overheads are indirect costs: indirect materials, indirect labour and indirect expenses. You cannot trace them to a single unit of output, so you first gather them and then push them towards cost centres.

Collection comes first. Every overhead expense is picked up from its source document, such as a purchase invoice, a stores requisition, a wage sheet or a rent bill. It is then recorded under a standing order number or cost code, so that each item lands in the right head and the right department. Good collection depends on a sound classification and codification of overheads.

Allocation is the next step. When an overhead item belongs wholly to one cost centre or cost unit, you charge the full amount straight to it. Examples: the salary of the foreman of the Machining department goes wholly to Machining. The cost of a special tool used only in the Assembly department goes wholly to Assembly. The key test is simple: can you say with certainty which single centre incurred this whole cost?

If the answer is no, the item is shared. For example, factory rent serves many departments. You then use apportionment, which splits the item over several centres on a fair basis such as floor area. So the difference is this: allocation charges the whole item to one centre; apportionment divides it among several.

After allocation and apportionment, service department costs are re-apportioned to production departments, and finally overheads are absorbed into products. This page covers the first two stages: collection and allocation.

Key rules to remember

Allocation rule: Allocated overhead = Whole amount of an item identified with one cost centre or cost unit; No basis or ratio is needed. The item is charged in full to the centre that incurred it.
Allocation vs apportionment: Allocation = whole item to one centre; Apportionment = item divided among two or more centres; Use this test first for every item in the overhead statement.
Departmental total after allocation: Total overhead of a centre = Allocated items + Apportioned share of common items; Use it when building the primary distribution statement.
Check total: Σ overheads distributed to all centres = Total overheads collected; Always verify this. Nothing should be lost or counted twice.

How to solve Collection and Allocation of Overheads questions

Use this method for any question that asks you to collect, allocate or distribute overheads to cost centres.

1List all overhead items given and total them. Exclude direct materials, direct labour and direct expenses, and anything that is not a cost, such as items of pure finance or appropriation.
2Read the wording of each item. Look for phrases such as 'specific to', 'used only by' or 'incurred for' a named department. These signal allocation.
3Allocate each such item in full to the named cost centre. Write it in that centre's column in the statement.
4Treat the remaining items as common. Choose a suitable basis for each and apportion them, if the question asks for it.
5Draw a columnar statement: items in rows, cost centres in columns, with a total column.
6Add each column and add across. Check that the sum of the centre totals equals the total overheads.
7If asked, comment briefly on which items were allocated and which were apportioned, and why.

Quickest way: Two-pass tick method

When to use it: Use it when a question has many overhead items and little time.

First pass: tick every item that names one department. Write its amount straight into that column.
Second pass: mark the left-over items as common and note the basis given beside each.
Total the columns and cross-check with the grand total before moving on.

Common mistakes in Collection and Allocation of Overheads

Using the words allocation and apportionment as if they mean the same thing.
Both words describe distributing overheads, so they sound alike.
Fix: Remember: allocation is the whole item to one centre; apportionment is a share of an item to many centres.
Apportioning an item that is clearly specific to one department.
Students apply a basis such as area to every item out of habit.
Fix: Scan the wording first. If the item names one department, charge it in full there.
Including direct costs in the overhead statement.
The question lists all expenses together and students distribute everything.
Fix: Separate direct materials, direct labour and direct expenses before you start. Only indirect costs go to the statement.
Not checking that the totals agree.
Students run out of time or trust their arithmetic.
Fix: Always compare the sum of departmental totals with the total overheads collected. It takes seconds.
Writing allocated amounts in the wrong column.
Several departments with similar names, such as Stores and Store Maintenance, cause confusion.
Fix: Underline the department name in each item and match it to the column header before writing the figure.

Worked examples

Example 1

Rahul Industries has three departments: Cutting, Finishing and Stores. Overheads for a month are: indirect wages of Cutting ₹40,000; indirect wages of Finishing ₹30,000; depreciation of Cutting machines ₹25,000; repairs to Finishing equipment ₹15,000; salary of the storekeeper ₹20,000; factory rent ₹60,000 (common to all). Identify which items are allocated and find the total allocated to each department.

Show the solution

Items naming one department are allocated: indirect wages of Cutting, indirect wages of Finishing, depreciation of Cutting machines, repairs to Finishing equipment and the storekeeper's salary (Stores).
Factory rent is common to all three departments, so it is apportioned, not allocated.
Cutting: ₹40,000 + ₹25,000 = ₹65,000.
Finishing: ₹30,000 + ₹15,000 = ₹45,000.
Stores: ₹20,000.
Total allocated = ₹65,000 + ₹45,000 + ₹20,000 = ₹1,30,000. Factory rent of ₹60,000 remains for apportionment. Total overheads = ₹1,90,000.

Answer: Allocated: Cutting ₹65,000, Finishing ₹45,000, Stores ₹20,000 (total ₹1,30,000). Factory rent ₹60,000 is apportioned.

Example 2

Meera Engineering has two production departments, Fabrication (P1) and Assembly (P2), and one service department, Maintenance (S). Monthly overheads: supervisor salary of P1 ₹36,000; supervisor salary of P2 ₹28,000; Maintenance staff wages ₹24,000; lubricants used only in P1 ₹8,000; power ₹50,000 (common). Prepare the allocation part of the primary distribution statement and state the amount left to apportion.

Show the solution

Allocate P1 items: supervisor salary ₹36,000 + lubricants ₹8,000 = ₹44,000.
Allocate P2 item: supervisor salary ₹28,000.
Allocate S item: Maintenance staff wages ₹24,000.
Power of ₹50,000 is common and has no single department, so it is left for apportionment on a stated basis such as units consumed or machine hours.
Check: ₹44,000 + ₹28,000 + ₹24,000 = ₹96,000 allocated. Add power ₹50,000 to get ₹1,46,000, which equals the total of all items (36,000 + 28,000 + 24,000 + 8,000 + 50,000 = ₹1,46,000).

Answer: Allocated: P1 ₹44,000, P2 ₹28,000, S ₹24,000 (total ₹96,000). Power ₹50,000 is left to apportion; total overheads are ₹1,46,000.

Exam tips

Start every overhead statement by labelling each item as allocated or common. Examiners award marks for the correct treatment, not just the final figure.
In theory questions on the difference, write the definition of each term and add one example of each. Two or three points are enough.
Do not apportion an item when the question says it relates to one department. Wasted time and wrong figures both cost you.
Show the total check at the bottom of your table. It signals accuracy and helps you catch slips.
In the compulsory MCQ section, watch the wording: 'wholly charged to one cost centre' means allocation.

Practice questions from Overheads

Collection 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.

Collection and Allocation of Overheads: frequently asked questions

What is the difference between allocation and apportionment of overheads?

Allocation charges the whole amount of an overhead item to a single cost centre or cost unit that clearly incurred it. Apportionment divides an item that is common to several centres among them on a fair basis. Allocation needs no basis; apportionment does.

How are overheads collected in cost accounting?

Overheads are taken from source documents such as invoices, requisitions and wage sheets. They are then recorded under cost codes or standing order numbers, so each item goes to the right head and department.

Can an overhead be allocated to a cost unit and not only to a cost centre?

Yes. If an overhead is incurred wholly for one cost unit, such as a special jig made for one job, it is charged directly to that unit. Most overheads, however, go first to cost centres.

Is allocation or apportionment done first?

Allocation is done first for items that are clearly identifiable with one centre. Then the remaining common items are apportioned. The two together form the primary distribution of overheads.