Question

Why should manufacturing use an Allocation Base in the process of determining applied manufacturing overhead? Please help, thank you.

Answer 1

Manufacturing overhead refers to the direct an indirect overheads that are primarily absorbed in the production processes. When it comes to calculating the total cost of a particular unit of a product, all specific costs that are directly attributable to every unit of product could be added up easily. However, there will be aggregate costs which will have to be absorbed in to unit wise data cost sheet through an allocation process. The fact that overheads play an important role in product pricing and company's bottom line makes the overhead allocation process very much critical for every company. From the different types of cost allocation methods, the company would select whichever method that would suit the convenience and requirements of the company. The following are the various needs the company aims to achieve through cost allocation;

1. For valuing inventory and inventory management.
2. Guide management's decision making activities.
3. Determining what are the economic constraints that would affect their planning.
4. Determining the product wise profitability.
5. Obtain fair prices through competitive bidding.