Proration definition
/What is Proration?
Generally, proration is the process of dividing up something in a proportional manner, such as the expenses among tenants that relate to common area expenses. Proration ensures fairness by allocating costs or benefits in a way that reflects each party’s proportional use or ownership. Several variations on the concept are noted below.
Proration in Overhead Cost Allocations
Proration can refer to the allocation of under- or over-allocated overhead costs among the work-in-process, finished goods, and cost of goods sold accounts at the end of an accounting period. This type of proration is commonly used when deriving the amount of ending inventory to report on a firm’s balance sheet.
Proration in Tender Offers
Proration occurs when a company conducting a tender offer receives more shareholder interest than the amount of cash or stock available for purchase. Since the company cannot fulfill all shareholder requests in full, it distributes the available resources proportionally based on the number of shares each investor tendered. For example, if a company offers to buy back 1 million shares but receives offers for 2 million shares, each shareholder may only have 50% of their shares accepted. This ensures a fair allocation among all participants while allowing the company to control the total payout or share repurchase amount.