Accounting Overhead Allocation

 Accounting Overhead Allocation

What is Overhead Allocation?

Overhead Allocation is a way of sharing the cost across multiple jobs. We know that there are two types of costs, one is direct and the other is indirect.  Direct costs are identical on the other hand indirect costs can't be traceable in the product. So, the indirect costs are not related to any single product. These costs should be divided into the number of products produced.

How to Allocate Overhead?

1. Gather Your Costs
2. Select Your Method
3. Allocate Overheads

Gather Your Costs

To allocate overheads you first need to find out the total cost related to a product. You can simply find the process and calculate the total cost related to the product.

Select Your Method

There are several methods of overhead allocation.
  • Total direct job costs
  • Direct labor costs
  • Direct labor hours
  • Equipment costs
According to your business type, you need to find the best method for allocating overhead costs.

Allocate Overheads

Costs should be allocated according to the predetermined overhead rate. You can allocate the overheads using machine hours or labor hours that depend on the production process of the company.
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