Question

What is an example of an expense allocation concept?

Answer 1

Expense allocation is done when a particular expense cannot be directly linked to a particular job or product. Expense such as inspection charges, Supervisor’s salary, building rent, Electricity expense, Administrative expenses etc are not directly connected to any particular jobs rather they help in the production of all products. Generally a factory wide rate is used to allocate these costs. Some companies use ABC system also where cost is allocated according to the level of activity done in any particular job.

Lets take an example.

Suppose a company has overheads of 200000 which are not allocated to any job. Company decides to allocate these overheads on the basis of machine hours worked in the period. Say total machine hours are 5000. So overhead rate per hour comes to 40 per hour.(200000/5000)   

There are jobs such as

Job A—200 Machine Hours

Job C---700 Machine Hours

Job K---1900 Machine hours.

Allocated costs to these jobs would be like this.

Job A—(200*40)               $ 8000.

Job C---(700*40)               $ 28000.

Job K---(1900*40)            $ 76000.