The allocation base is the measure used to distribute or allocate overhead costs to individual products or jobs in a cost accounting system. It serves as the basis for assigning indirect costs to cost objects in a fair and systematic manner.
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The allocation base is a key component in job order costing, as it is used to determine the amount of overhead costs assigned to each job.
Common allocation bases include direct labor hours, direct labor costs, machine hours, and units produced.
Choosing an appropriate allocation base is crucial for accurately computing the cost of a job and determining the disposition of over- or under-applied overhead.
The traditional allocation method, which uses a single allocation base, is often criticized for its lack of accuracy in modern manufacturing environments.
Allocation bases are also used in the preparation of operating budgets, where they help estimate the expected overhead costs for the upcoming period.
Review Questions
Explain how the allocation base is used in the context of job order costing to compute the cost of a job.
In job order costing, the allocation base is used to apply overhead costs to individual jobs. The total overhead costs are divided by the allocation base (e.g., direct labor hours) to determine the overhead rate. This overhead rate is then multiplied by the allocation base for each job to determine the amount of overhead costs assigned to that job. By using the allocation base, the job order costing system can accurately compute the total cost of a job, which includes direct materials, direct labor, and the appropriate share of overhead expenses.
Describe the role of the allocation base in determining and disposing of underapplied or overapplied overhead.
The allocation base is crucial in the process of determining and disposing of underapplied or overapplied overhead. At the end of the accounting period, the total overhead costs may not match the amount of overhead that was applied to the jobs based on the predetermined overhead rate and allocation base. The difference between the actual overhead costs and the applied overhead costs is known as underapplied or overapplied overhead. The allocation base is used to calculate the overhead rate and to apply overhead to the jobs, so it directly impacts the amount of under- or over-applied overhead. Understanding the allocation base is necessary to properly account for and dispose of any discrepancies between actual and applied overhead.
Analyze how the choice of allocation base can affect the calculation of predetermined overhead and total cost under the traditional allocation method.
The choice of allocation base is a critical decision in the traditional overhead allocation method, as it can significantly impact the calculation of predetermined overhead rates and the resulting total cost of products or jobs. The allocation base should be selected carefully to ensure that it accurately reflects the relationship between overhead costs and the cost object. If an inappropriate allocation base is used, it can lead to distorted overhead rates and inaccurate product or job costing. For example, using direct labor hours as the allocation base may not be appropriate if the majority of overhead costs are related to machine-intensive processes. In this case, using machine hours as the allocation base may provide a more accurate reflection of the overhead costs incurred. Analyzing the impact of the allocation base on the traditional allocation method is crucial for ensuring the reliability and usefulness of the cost information generated.