Allocation of Expenses (and income) among various department of an entity.
An entity incurs various expenses along the course of its operation. Some are direct and instant(wages) whereas some are spread for a certain time period(advertisements). Some expenses are one time only(road toll) whereas some are incurred continuously throughout the life of business(rent and salaries). Some are incurred in the course of trade(discounts and freights) whereas some are incurred as fines and penalties(fine for late filing).

Keep in mind that both expenses and income have the same treatment for allocation.

Allocation of expenses means distribution of the expenses incurred by the entity among its departments. The main purpose of such allocation is to determine the status of the departments.A company may allocate its indirect costs in order to determine the entire cost of a cost object on a full absorption basis. Full absorption refers to the assignment of all possible costs to a cost object, so that the costs of all activities are considered. For example, if the entity pays rent, the expense is allocated among all the departments in the ratio of floor space occupied.

Since Floor space is occupied by all the departments rent is attributable to all departments. But some expenses are only attributable to a certain department. In such case, the expenses should be attributed to that department only. Say, the salary paid to a salesman is attributable only to the marketing department. Discount received, cargo and freight charges etc are fully attributed to the purchasing or procuring department.

There are some expenses which are neither common expenses nor are directly attributable to any department. They are of financial nature and can not be apportioned on a suitable basis. Thus they are transferred to the combined profit and loss account. Such expenses include interest paid on loan, fines and penalties of the firm, profit or loss on sale of investments.


To sum up, here is a list of basis of allocation and the expenses attributed on that basis.
1. Sales Of Each Department : (salesman salary, packing charges, advertisement cost)
2. Purchase Of Each Department: (discount received, freight etc)
3. Area Of Floor Space Of Each Department : ( Rent, Heating and AC charges)
4. Value Of Assets In Each Department :( depreciation, insurance)
5. Number Of Workers : (Timekeeping, Canteen exxpenses)
6. Direct Wages : ( Compensation to workers, group insurance)
7. Number Of Light Points : ( electricity)
8. Horse Power Of Machine And /Or Production Hours : (Power and fuel)

Hope I answered your queries. Best wishes!!
Chiranjibi Chapagain.