Question

In 200 words or more, describe an example of indirect cost allocation in the manufacturing industry. Provide at least two examples of chosen topic using specific information.

Answer 1

Indirect cost are those cost which can not be directly identifiable to an activity. Cost other than dorect cost are indirect cost. These cost are allocated to various cost object on the basis of some principle these may be on the basis of activity, proportional or other classification.

Example 1 - Suppose in a rubber manufacturing company labour hour of department A and B are 1200 and 1300 hours and respective indirect cost (labour) is $ 25000 Now we will use activity based alocation to allocate the cost -

Cost per driver = $ 25000 / 2500

= $ 10 per hour

Cost to be allocated to Depart A = 10 * 1200

= $ 12000

Cost to be allocated to Depart B = $ 13000

Example 2 - In above calculation if we allocate indirect cost on the basis of direct cost of each department i.e. $ 10000 for department A and $ 20000 for department B -

Overhead rate = $ 25000 / $ 30000

= 0.833

Cost to A = 0.833 * 10000

= $ 8333

Cost to B = 0.833 * 20000

= $ 16667