What it means
Costs that cannot be traced directly to one part of a business still have to end up somewhere. Apportionment provides the rule for that journey, taking a total such as rent, insurance or the cost of a shared IT team and splitting it using floor space, headcount, machine hours, revenue or any other measure that reflects the benefit received.
The choice of basis is a management decision, not an accounting fact. Rent split by floor area will make a warehouse look expensive, while the same rent split by revenue will push the cost onto the department with the biggest sales, and the two answers can differ enormously.
Apportionment also has a time dimension. An insurance premium paid for a year is apportioned across twelve months, and a property tax bill is apportioned between buyer and seller by the number of days each owned the property, so that each period or party bears only its share.
In tax, apportionment describes how a business trading across several states or countries divides its taxable profit between them. Formulas typically use sales, payroll and property to work out what proportion of the profit belongs to each place, and the details differ enough that they change the total tax bill.
The practical risk is arbitrary numbers becoming permanent. Once a basis is set it tends to survive for years, so it is worth asking periodically whether the split still matches how the shared resource is actually consumed.
In practice
Real-world examples.
Example
A software company trades across several states, with $2,500,000 of its $10,000,000 total sales made in one of them, giving a sales factor of 25%. If taxable income is $1,600,000, then $1,600,000 x 0.25 = $400,000 is apportioned to that state and taxed at its rate.
Example
A restaurant group pays a $60,000 annual insurance premium in advance in January. Rather than charging the whole amount to January, it apportions $60,000 / 12 = $5,000 to each month so that every month's profit figure carries its fair share of cover.
Example
A commercial property changes hands part way through the tax year, with an annual property tax bill of $7,300, or $7,300 / 365 = $20 a day. The seller has already paid the year in full, so the buyer reimburses $20 x 100 = $2,000 for the 100 days remaining after completion.
Formula
Calculation
Apportioned share = total amount x (unit's measure of the basis / total measure of the basis)
A manufacturer pays $240,000 a year in rent for a 12,000 square foot site occupied by three departments: production at 7,200 square feet, warehousing at 3,000 and offices at 1,800. The rate per square foot is $240,000 / 12,000 = $20.
Production takes 7,200 x $20 = $144,000, warehousing takes 3,000 x $20 = $60,000, and offices take 1,800 x $20 = $36,000. The three shares add back to $144,000 + $60,000 + $36,000 = $240,000, which is the check that any apportionment must pass: the parts must equal the whole.Case study
Seen in the real world.
The following is an illustrative, fictional scenario. Barrowfield Foods, an invented chilled foods business, apportioned its $480,000 shared IT cost by headcount. With 150 of its 200 staff in the factory, the factory carried $480,000 x 150 / 200 = $360,000 and the sales division carried $480,000 x 50 / 200 = $120,000, which left the factory manager convinced that head office was hiding its own costs in his budget.
A review of the IT helpdesk log told a different story. Of 1,200 support tickets in the year, only 300 came from the factory floor while 900 came from the laptop-heavy sales division, whose customer system also consumed most of the licence spend.
Reapportioning on tickets gave the factory $480,000 x 300 / 1,200 = $120,000 and sales $480,000 x 900 / 1,200 = $360,000, an exact reversal of the original split. The fictional business did not spend a penny less on IT, but the sales director suddenly took a keen interest in reducing licence numbers, which is usually the point of getting the basis right.
Watch out
Common mistakes.
- Confusing apportionment with allocation, when allocation assigns a whole cost to the one department that caused it and apportionment splits a shared cost between several.
- Picking a basis because the data is easy to obtain rather than because it reflects how the cost is actually driven.
- Failing to check that the apportioned shares add back to the original total, which is where rounding errors and forgotten departments show up.
Questions
People also ask.
Does apportionment change the total cost a business incurs?
No, it only changes where that cost appears in the internal reports, though it can change behaviour by making one manager feel the weight of a shared resource.
Which basis should be used for rent and building costs?
Floor area is the usual choice because it tracks the benefit received, although a department occupying prime air-conditioned space may reasonably be charged more per square foot than one using a cold store.
Is apportionment allowed under accounting standards?
Yes for production costs, which must be apportioned into stock values under normal capacity assumptions, while internal management apportionments are a matter of policy rather than a rule.
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