Question

What are three common methods of assigning overhead costs to a product?

Short answer

Plantwide overhead rates, departmental overhead rates, and activity-based costing.

Step-by-step solution

Meaning Overhead Cost

Overhead costs are expenses not directly related to the cost of goods or services. It includes all the indirect material, indirect labor, and indirect expenses. It is recorded in the business entity's income statement.

Three common methods of assigning overhead costs to a product are as follows

a. Plant-wide overhead rates

Suppose an enterprise features a significant amount of overhead to distribute. In that case, the services provided by multiple divisions differ deeply or must use a variety of specialized assignment bases; a plant-wide overhead rate is not fair.

b. Departmental overheads rates

The conventional cost allocation strategy is to duplicate a standard departmental overhead rate by the number of units of action expended if the departmental costing approach strategy is employed.

c. Activity-based costing (ABC)

ABC used is to divide overhead consumption for goods and administration such as finance and utilities. Compared to the old costing approach, activity-based costing makes the allotment of indirect costs simpler.