Question

what is the difference between utilizing the allocation-rate approach, the proration approach, and the write-off approach.

Answer 1

(1) What is Allocation Rate approach?

Solution: It is an approach under which the company makes the reconciliation of estimated overhead cost and real overhead cost. The under and over the allocation of overheads are adjusted in the books of accounts i.e. general ledger or subsidiary books as required.

Example: The estimated overheads were $5000 and actually happened $8000. Then the difference i.e. $3000 will be adjusted in the books of accounts.

Q2: What is proration approach?

Solution: Under this approach, the company prorates the overheads on the basis of predefined parameters i.e. firm's revenue

Example: Suppose the firms have overheads $20000 and revenue $100000. Therefore, the allocation rate is 20%

Allocation rate = Overheads/ Revenue * 100

= $20000/ $100000*100= 20%

Q3: What is write off approach?

Solution: Under this method, the under and over-allocated overheads is adjusted or write off against the cost of goods sold by the company.

Example: Suppose the estimated overheads were $10000 but actual overheads incurred $15000. Then the difference i.e. $5000 will be adjusted or write off against the cost of goods sold.