What does it mean to assign overhead costs? There are several options for assigning overhead costs,...

What does it mean to assign overhead costs? There are several options for assigning overhead costs, what are the common allocation bases? What others could be used? Which is the best?

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Overhead costs are stated as those product costs which are not capable of being directly traced to any specific cost unit.As these are product costs these need to be charged on some basis to cost units.The process under which the overhead cost is charged to cost units is called as assigning of overhead costs.

Overhead costs need to be assigned simultaneously with production as cost ascertainment cannot wait till period's end to arrive at actual product costs and overhead costs.

Thus,overhead costs are assigned using predetermined basis.

As the overhead costs are assigned on predetermined basis by using a predetermined overhead rate.The predetermined overhead rate is calculated as:

Pre-determined overhead rate=Estimated overheads/Estimated base units

The commonly used allocation bases are:

Direct labor hours
Direct labor cost
Machine hours
Direct material cost

Other bases that can be included are:

Production units
Direct material units

The best base to be chosen depends on a given situation.The base chosen should allow for fair charging of cost to cost units.The allocation base is stated to be the best when the changes in allocation base corresponds roughly to the actual cost.

ABC is recommended for assigning the overhead costs. Under it the total overhead costs is divided into cost pools and each of the cost pool makes use of a base that is appropriate to it.Under ABC multiple rates are there so it would help in better allocation of costs.

ekkarill92 answered 1 year ago

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