Accounting Essay Example

Institute

How accurate should we strive to make overhead cost allocation?

Cost allocation is among the most complicated tasks in managing a company. Overhead costs consist of each an every doings or material that you make use of in trading. Working out indirect expenses is one of the major challenges in expense allocation. Two approaches are used to assign overhead expenses: Direct process and Activity Based Costing.

The first approach is the direct process which makes use of a specific cost driver to establish overhead expenses. A cost driver is every action in a company employed to establish cost. Cost drivers, for instance are work hours or machinery hours. A pre established overhead rate (POHR) is employed and multiplied by the help of cost driver for every given manufactured goods that a company produces. The next approach of expense allocation is Activity Based Costing (ABC) which employs a lot of cost drivers in establishing overhead costs. A single product might have expense drivers such as: amount of batch produced, amount of check up per batch, and charge per machine setup.

Making use of standard terminology for price allocation administration in order to regulate communications among stakeholders is another way of determining overhead cost allocation. There should be centralization of price allocation information, the aim is to reduce information fragmentation, enhance source of accuracy for information, decrease amount of systems required to sustain stakeholder and moderate the complication of solutions. Stakeholder ought to always struggle to make price allocation management information understandable to all other suitable stakeholder. Following business standard, most excellent practices and directing for price allocation management. One of the major usual mistakes enterprises make is to design solutions from scratch or with no leadership, assistance and skills of others who have designed such solutions, previous to them. Work toward and uphold a single source of truth, when achievable, whereas it might not be possible to strictly uphold a single source of accuracy for all data items at all times.

Reference

. Protiviti Inc.Cost allocations and the financial close cycleBoken, P & Callaghan, G (2010).

. McGraw-Hill. Australia.). Management Accounting: Information for Managing and Creating Value (5th Edition)Langfield-Smith, K., Thorne, H. & Hilton, R.W. (2009