BackgroundBackground
Recall that Factory Overhead is applied toproduction in a rational systematic manner,using some type of averaging. There are avariety of methods to accomplish this goal.
These methods often involve tradeoffsbetween simplicity and realismSimple Methods ComplexMethodsUnrealistic Realistic
Broad AveragingBroad Averaging
Historically, firms produced alimited variety of goods whiletheir indirect costs were relativelysmall.
Allocating overhead costs wassimple: use broad averages toallocate costs uniformlyregardless of how they areactually incurred
The end-result: overcosting and
Over- and UndercostingOver- and Undercosting
Overcosting – a productconsumes a low level of resources but is allocated highcosts per unit
Undercosting – a productconsumes a high level of resources but is allocated lowcosts per unit
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