Question

What are three reasons that overhead must be allocated to products?

Answer 1

Answer:

The three reasons behind allocation of overheads to the products are;

1. To comply with the Accounting Principles which require that the inventory costs of a product shall include both direct and indirect manufacturing costs / overheads;

2. To record each product inventory at its correct cost of manufacture thus, presenting a true picture of the inventory assets of the company;

3. Indirect Costs / overheads as their name suggest are not directly traceable to any particular product and hence it is necessary to allocate these costs.