In the manufacturing sector, if the indirect cost amount is large enough, an incorrect allocation base...

In the manufacturing sector, if the indirect cost amount is large enough, an incorrect allocation base could have serious repercussions. What might be some examples of the effects of an incorrect allocation? How might that affect a company’s profitability and decision-making?

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Indirect costs are basically that costs which are not directly attributable to any product or department but are allocated proportionately to the respective based on their usage or some other standard methods.An incorrect allocation of indirect costs to any product or department will lead to higher cost price or service cost and therefore ultimately there will be lack of efficiency and so the company's profitability may suffer.

example-suppose there is an huge indirect cost of 10 lakhs in an entity.and there are just two departments one is production and the other one is marketing.Now if we allocate inappropriately all the cost to production department then ultimately product will be high and because of this, it will lose market competitiveness.Because customers will not buy high priced products and this will ultimately lead to loss to company's profitability and will also affect the company's decision-making adversely because company may have to take decision to abandon such high and ineffective costly products in the long run.

ekkarill92 answered 1 year ago

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