The goal of whichever cost allocation method you use is to either spread the cost in the fairest way possible, or to do so in a way that impacts the behavior patterns of the cost objects. Thus, you may continue to refine the basis upon which you allocate costs, using such allocation bases as square footage, headcount, cost of assets employed, or (as in the example) electricity usage. Overhead costs are charged to the expense account, and they must be continually paid regardless of whether the company is selling any good or not.The very term "allocation" implies that there is no overly precise method available for charging a cost to a cost object, so the allocating entity is using an approximate method for doing so. They support the production or selling processes of the goods or services. They are not related to the labor or material costs that are incurred in the production of goods or services. Overhead costs are indirect costs that are not part of manufacturing costs. Indirect costs increase or decrease with changes in the level of output. The other category of indirect cost is variable costs, which vary with the level of output. An example of a fixed cost is the remuneration of a project supervisor assigned to a specific division. Fixed costs are costs that are fixed for a specific product or department. Indirect costs can be divided into fixed and variable costs. The costs are first identified, pooled, and then allocated to specific cost objects within the organization. Some common examples of indirect costs include security costs, administration costs, etc. They are costs that are needed for the sake of the company’s operations and health. Indirect costs are costs that are not directly related to a specific cost object like a function, product, or department. For example, the salaries paid to factory workers assigned to a specific division is known and does not need to be allocated again to that division. It is because the organization knows what expenses go to the specific departments that generate profits and the costs incurred in producing specific products or services. These costs include:ĭirect costs are costs that can be attributed to a specific product or service, and they do not need to be allocated to the specific cost object. There are several types of costs that an organization must define before allocating costs to their specific cost objects. There are certain expenses which cannot be apportioned or allocated among the different departments on a suitable basis, the same should be transferred to General Profit and Loss Account (e.g., Interest on Capital, Debenture Interest, Loss on sale of assets, Interest on loan, General Manager’s Salary etc.). Horse Power or Horse Power x Hours worked.Light Points/Floor Area Occupied Assets value of each department.Floor area occupied or Value of floor space.
Insurance, Preliminary repairs to assets, Repairs and renewals etc.Insurance, Depreciation on Plant and Machinery, Fire. Rent, Rates, Taxes, Repairs to Building, Insurance, Maintenance or Depreciation of Building, Air Conditioning Expenses, etc.Discount Received, Carriage Inwards Provision for Discount on Creditors.Selling Expenses, Selling Commissions, Advertisement, Bad Debts, Carriage Outwards, Packing and Delivery Expenses, Godown Rent, Storage, Discount allowed, Travelling Salesmen’s Salary and Commission, After Sale Service, Sales Managers Salary, Provision for Discount Allowed, Freight Outwards etc.
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