Question

Overhead allocation is the process of spreading overhead (indirect costs) back to certain jobs, products or cost centers.

Find and describe an example of a company that uses at least three product lines. How would you define the overhead accounts, and what method would you choose to use to allocate these accounts back to the job, product, or cost center?

Answer 1

The example is of Home care product making company. Three product lines are dish wash bar, detergent bar and detergent powder

Overhead are the expenses which facilitate the manufacture of the products to be sold

Overhead accounts consist of the following

• · Indirect material
• · Indirect labor
• · Plant maintenance
• · Plant depreciation
• · Machinery depreciation
• · Plant supervisor salaries
• · Plant property taxes and rates
• · Plant insurance
• · Plant utilities

The method of allocation used to allocate overheads is machine hour. All the products are manufactured with machines and hence machine hours used by these products are used for allocation of overheads to the product .Machine hours are defined for each product to be manufactured in the system. At the end of the month the overheads are allocated based on machine hours actually used.