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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Expert Solution

The cost for producing the finished goods require various indirect costs apart from direct materials and direct labor. The process of allocating such indirect costs is called overhead allocation. It is the apportionment of indirect costs to produced goods. The company incurs manufacturing overhead other than direct costs. Hence, these need to be allocated using the inventory that are classified as work in process or finished goods.

The most common allocation bases are direct labor hours, direct labor costs, and machine hours

The other allocation bases that can be used are number of machine setups, number of batches, plantwide overhead rate, square footage, electricity consumption, etc

It differs in terms of requirement of the company. In case of service based companies, direct labor hour allocation base is the best while in case of manufacturing companies, direct machine hours is the best.

ekkarill92 answered 1 year ago

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