Lesson 2, Topic 2
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Allocation of Expenses

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Trading, Profit and loss accounts are prepared for each department by following the normal procedures but common expenses have to be apportioned thus:

1. Expenses Incurred for one department: Any expense specifically incurred on behalf of a department will be charged to that particular department.

2. Expenses incurred on behalf of all the department: Any expenses incurred for the benefits of all departments not capable of precise allocation will be treated using any of these basis:

(i) Turnover basis

(ii) Floor area basis

(iii) Number of articles sold basis

(iv) Direct analysis basis.

The following bases of allocation are suggested. It should be noted that the basis of allocating expenses will depend on the method specified in the examination.

Allocation of Expenses And Incomes

Illustration 1

Assuming the floor areas are: A: $$\frac{2}{5}$$, B: $$\frac{2}{5}$$, C: $$\frac{1}{5}$$

a. Apportion the selling expenses using the sales basis.
b. Apportion Insurance using the floor area basis.

Solution

(a)
Turnover basis: Selling expenses
Total Sales = A + B + C = 20,000 + 30,000 + 40,000 = 90,000
Department A: 20,000∕90,000 x 16,000 = N3556
Department B: 30,000∕90,000 x 16,000 = N5,333
Department C: 40,000∕90,000 x 16,000 = N7,111

(b)
Floor area basis: Insurance
Department A: 2∕5 x 25,000 = N10,000
Department B: 2∕5 x 25,000 = N10,000
Department C: 1∕5 x 25,000 = N 5,000

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