Chapter C, Problem 1DQ

Why are overhead costs allocated to products and not traced to products as direct materials and direct labor are?

To determine

The reason for overhead costs allocated to products and not traced to it as direct materials and labor are.

Explanation of Solution

Introduction:

Activity-based costing:

It is an accounting method which identifies the activities in an organization and assigns costs to each of these activities. These costs are then assigned to the products and services based on the total consumption by each. It assigns more indirect costs into direct costs compared to other conventional methods of accounting.

The reason for overhead costs allocated to products and not traced to it as direct materials and labor are:

The overhead costs associated with the manufacturing process cannot be traced directly to the units of product like it is done with the direct materials and direct labor. If they are to assign the overhead costs to the units of product, it will require some special kind of allocation on some “reasonable” basis.