Methods of Allocating Work Overhead

Allocating work overhead refers to the process of assigning indirect costs to various products or services that a business offers. There are different methods of allocating work overhead, including:

1. Direct labor hours method - This method allocates overhead costs based on the number of hours worked by employees on a particular project. The merits of this method include its simplicity and accuracy in assigning overhead costs to a specific product or service. However, it may not be ideal for businesses that do not rely heavily on labor.

2. Machine hours method - This method allocates overhead costs based on the number of hours a machine is used in the production process. The merits of this method include its accuracy in assigning overhead costs to a particular product or service. However, it may not be ideal for businesses that do not use machines heavily in their production process.

3. Direct material cost method - This method allocates overhead costs based on the cost of materials used in the production process. The merits of this method include its simplicity and accuracy in assigning overhead costs to a particular product or service. However, it may not be ideal for businesses that have varying material costs.

4. Activity-based costing method - This method allocates overhead costs based on the activities that consume the most resources in the production process. The merits of this method include its accuracy in assigning overhead costs to a particular product or service. However, it may require a significant investment in time and resources to implement.

5. Square footage method - This method allocates overhead costs based on the amount of space used in the production process. The merits of this method include its simplicity and accuracy in assigning overhead costs to a particular product or service. However, it may not be ideal for businesses that have varying space requirements.

Conclusion

Each method of allocating work overhead has its merits and demerits. Companies should choose a method that aligns with their business needs and goals. Businesses may also choose to use a combination of methods to allocate overhead costs effectively.