Chapter 19, Problem 2DQ

To determine

Introduction:

Cost allocation of Overheads

• Cost allocation of Overheads takes place on basis of cost objects identified to enable cost allocation. Overheads refer to costs of operations and comprise of direct costs such as manufacturing expenses and of indirect costs in the form of selling and administrative expenses.

• Examples of Overheads are Salaries of administrative staff, rent of office, advertising expenses etc. The costs of the operations are allocated on basis of cost objects. Cost objects are units of cost allocation identified for overhead allocations and cost estimations.

• Examples of Cost objects for Overhead allocation are Number of units produced, number of labor hours worked etc.

To Determine:

Factor / Base to assign overhead costs apart from percentage of labor cost.

Solution:

Another factor that may reasonably be used to assign overhead costs, apart from percentage of labor cost is Machine Hours consumed by each process for the production of goods manufactured.