Before a product's cost can be calculated, every rupee of factory overhead — rent, power, depreciation, the security guard's salary — needs to find its way to a product. Allocation of overheads is the very first step in that journey: identifying which cost centre directly caused an overhead, and charging it there in full.
Here is the key distinction examiners love to test. Allocation means the entire overhead item belongs to one cost centre — no splitting needed. For example, if Machine Shop A has its own dedicated power meter reading ₹18,000 for the month, that ₹18,000 is allocated to Machine Shop A. Contrast this with apportionment, where one overhead has to be shared across multiple centres because no single centre caused it exclusively — for instance, factory rent of ₹1,20,000 shared between three departments on floor-area basis. Think of allocation as "this bill is yours alone" and apportionment as "let's split the bill fairly."
In practice, the overhead-distribution process runs in two stages. Primary distribution deals with spreading all factory overheads (both allocated and apportioned) across all cost centres — production departments (like Machining, Assembly) and service departments (like Stores, Maintenance). Once that is done, secondary distribution re-distributes the service department totals into the production departments only, because only production departments actually make products. The most common methods for secondary distribution are: (a) Direct re-distribution — ignoring inter-service transfers; (b) Step/ladder method — partially recognising inter-service; and (c) Reciprocal/simultaneous equation method — fully recognising mutual service. The ICAI exam most frequently tests the repeated distribution and simultaneous equation methods for secondary distribution, so be comfortable with both.
A good rule of thumb for choosing the basis of apportionment: pick the factor that best reflects how that overhead is caused. Factory rent → floor area (sq. metres); Power → KW hours or HP × hours; Personnel/HR costs → number of employees; Asset depreciation → asset values. The ICAI Study Material gives a standard list — memorise those bases because a 2-mark fill-in-the-blank on "appropriate basis" appears almost every attempt.