Last editedJan 20212 min read
Apportionment is a term used in accounting to describe the way a business separates and distributes a portion of its gross income. This can also apply to a company’s overheads as a way to calculate the correct costs, especially when the business is spread across different departments, subsidiaries or countries of operation.
For example, if a business operates in several different countries, then its income, sales and expenses need to comply with the specific tax laws for each geographical area. So the application of an apportionment rate needs to be calculated in order to properly allocate profits across a company’s different accounts, partner companies and departments.
Calculating apportionment for overheads
This example will deal with apportionment of overheads, so first you’ll need to identify your overhead amount. Say, for example, you want to figure out how to apportion electricity costs across the four departments of your business. For a given month, your electricity bill is £300. Your departments, broken down by the number of employees, are:
Accounting and finance: 12
Management and HR: 9
This gives a total of 135 employees.
In order to apportion the cost of electricity to one specific department, you simply multiply the amount of the overhead by the number of employees in that department, then divide that by your total number of employees.
So, if you want to calculate the apportionment rate for manufacturing, it would be:
£300 x 83 / 135 = £184.44
Then, to obtain this as a percentage, simply divide the apportionment rate by the total overhead cost amount, and multiply by 100, as follows:
£184.44 / £300 x 100 = 61.48%
Therefore, in this example, your manufacturing department is apportioned 61.48% of the electricity cost.
Calculating apportionment for income
While with overheads you may factor in the number of employees per department, for profits it is often more applicable to factor in the year’s business quarters instead.
First, you must identify the amount that is to be apportioned. If you are calculating apportionment for a single quarter, then you must calculate the gross income for that quarter. Put simply, this is how much money came into the business during that time, before tax or any other expenses.
1. Identify your gross income for the quarter
For example, in the third quarter (1 July to 30 September), there are 92 days. Let’s say your gross income for this period was £80,000.
2. Calculate your company’s book value
Next, you need to calculate your business’s valuation by subtracting your tangible assets and liabilities from your total physical assets. Let’s say this figure is £2,000,000.
3. Divide your gross income figure by the number of days in the relevant quarter
So for this calculation, that’s £80,000 / 92 = £869.56 per day.
4. Multiply this number by the number of days in the year
For a typical year, this number will be 365 – except in a leap year, when you would use 366. In our example, the formula is £869.56 x 365 = £317,389.40.
5. Finally, divide your final figure by the value of your business
This will give us our apportionment percentage. So, £317,389.40 / £2,000,000 = 0.1586. This can also be multiplied by 100 to give a percentage of 15.86%.
Why is apportionment used?
Apportionment can be useful for a number of reasons. Because it can be applied to both a company’s takings and its overheads, the purpose of this calculation can range from fulfilling a legal tax requirement to providing an effective way to manage bookkeeping. Generally speaking, it exists for instances where an overhead or income cannot be attributed to a single cost centre or area of a business, meaning the sum must be apportioned over any relevant areas.
We can help
If you’re interested in learning more about apportionment and would like to find out more then get in touch with the financial experts at GoCardless. Find out how GoCardless can help you with ad hoc payments or recurring payments.