1.13  Query:    

        Basis of apportionment of overheads.

1.A public company is engaged in the business of extraction, production, manufacture and sale of coal, soft coke, hard coke, washed coal and other by-products, viz., coal tar and coal breazes as well as development of mines falling within its jurisdiction.

2. Since inception, the headquarter and area overhead expenses are distributed in the revenue and the development projects on the basis of capital investment. Further, the amount apportioned to revenue projects is distributed on the basis of production and the portion of overhead apportioned to the development projects is capitalised by these projects on the basis of capital investment. The system is consistently and uniformly followed by the company since inception. As per the prevalent system, the development project which has got heavy capital investment with a comparatively lower manpower is to bear higher burden of overhead expenses, which automatically increases the cost of the project irrespective of the quantum of services rendered to them. This has been viewed by some authorities as irrational.

3. On the basis of the above, the querist has sought the opinion of the Expert Advisory Committee on the following issues:

(a) Whether the aforesaid basis of overhead apportionment between revenue and development projects is rational or not.

(b) If not, what should be the suitable alterative methods of distribution of overheads in revenue as well as development projects?

                                                                                      Opinion                            June 14, 1991

1. The Committee notes that the rational criterion for selecting an overhead apportionment base is the extent of benefit derived from the incurrence of overhead by the consuming department/activity. For example, overheads of an EDP Department can be apportioned among the user departments on the basis of number of hours for which each department has used the EDP facilities. Personnel department costs at head office can be apportioned on the basis of the number of workers employed in revenue and development projects. Capital investment base can be considered appropriate for apportioning interest. If the expenditure can not be correlated to the benefit derived by the concerned department activity clearly, the same may be allocated on some other rational basis. Thus, separate basis of apportionment may be appropriate for different items of overhead.

2.The Committee is of the opinion that apportionment of head office and area overhead costs among revenue and development projects on the basis of capital investment may not be rational as it may not appropriately measure the extent of benefit derived by the said projects. The Committee is further of the opinion that it may be proper to apportion individual items of head office and area overhead expenses on the basis of the criteria mentioned in para 1 above.

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