CH 15

Cost allocation
Allocation overhead (indirect costs)
How we can allocate or trace overhead?
1 – By estimated average cost method, where we
divide estimated oh by estimated volume of
production.
To solve problem of allocation we use:
Cost center approach: is a group of different cost
elements, which will produce on services such as
maintenance dep- include 100 of cost elements,
but finally produce a maintenance services.
Steps of applying the cost center approach
1 – Divide the factory to two types of centers
(production center and support center)
2 – Then 3 words (assign, distribute, and allocate)
A-assigning the special costs to the related center
special cost such as indirect material, indirect
wages, and depreciation and the like.
B – Distribution of common costs (benefit with more than
one center, example: - rent (allocating of rent
between different centers according to space)
-social expense: trips, visits, according to number
of workers
-maintenance expense distributed according to
machine running hour
-motive power distributed according to machine
running hour or size, capacity
C-allocation of support centers between production centers
*There are 3 methods to allocate overhead costs:
1 – Direct method or straight method, how to be
applied? As a follows:
Each support dep- to be allocated only over the
production dep-, nothing else
In which The direct (allocation) method
ignores any services rendered by one support
department to another; it allocates each
support department’s costs directly to the
operating departments.
b. The step-down (allocation) method
allocates support-department costs to other
support departments and to operating
departments in a sequential manner that
partially recognizes the mutual services
provided among all support departments
according to the importance of each dep-.
c. The reciprocal (allocation) method
allocates support-department costs to
operating departments by fully recognizing
the mutual services provided among all
support departments