How accurate should we strive to make overhead cost allocation? — discuss with examples. Essay


Overhead Cost Allocations


As the economy shifts toward recover, a number of businesses are continuously found under pressure to plan for as well as achieve profitable goals. As a result, companies that conventionally directed much of their energies to the top-line growth have increasingly focused on cost (Ewer, Keller & Olson, 2010).

According to Wagenhofer (2000), overhead costs are ongoing administrative expenses of a given business entity which cannot be credited to any specific business activity. However, they are still necessary for the functionality of the business. Although cost management is often considered an operations-driven responsibility, the financial sector is playing a great role in supporting both the capture and analysis of cost-related data. Based on the renewed focus on the cost management, organizations are as well refreshing their responsiveness of the effect of overhead and indirect costs on the margin and bottom line. Therefore, organizations are developing a comprehensive view on the best processes that can effectively support the capture, application as well as providing feedback on the overhead cost allocations (Wagenhofer, 2000).

In order to know how costs are allocated the programs, organizations need to have a very well-built understanding of their cost per outcome. It is a measure that connects the unit-level economics of organizational operations with the impact that it wishes to achieve. Therefore, determining the unit-level costs, an organization is required to have clarity around its intended outcomes and the total costs of its programs. This implies that costs play a critical role in both deriving and planning for the revenues and profits, and thus managerial accounting is largely devoted to the measuring and accumulating of costs for control as well as continuous management of cost reduction. Consequently, for any cost-accounting method used it ought to be specific enough so as to enable the differentiation of costs to a detailed level that is necessary for a strategic decision at hand. It becomes imperative that the management practice the use of rational methods to both gather and analyze costs to provide data which can be used in decision making (Blaxill & Hout, 2000).


Overhead cost can be effectively and efficiently controlled through examining and resigning the processes which contribute to overhead. Majority of the companies have opted to compete by involving in indiscriminate cutting of their expenses so as to cut costs.


Blaxill, M.F. & Hout, M.T, (2000). The Fallacy of the Overhead Quick Fix, Harvard Business Review, pp. 93-101.

Ewer, S. R., Keller, C & Olson, K, S., (2010). No equivocating: Expense those idle capacity costs. Strategic Finance (June): 54-59.

Wagenhofer, A., (2000). The value of distorting overhead cost allocations in an agency setting. Management Accounting Research, 367-385.