Weighted proportion of direct costs overhead allocation method
1.1 Introduction
Definition: Weighted proportion of direct costs overhead allocation method as the name suggests, is an approach of direct cost allocation nature which focuses on the assessment of degree of usage of direct cost (economic resources available) by the various cost objects.
The cost objects can be job assignments or departments or various unit of a products in question. The process involves first appropriately assigning weights (percentages) on those cost objects so as to guide on how to allocate overhead costs from the General Ledger (GL) record. This method is applicable where an organization is undertaking production of two or more products or job assignments which share the same direct cost such as raw materials and or direct labor.
Steps of weighted proportion of direct costs overhead allocation method
To establish the amount of overhead cost to be allocated on every cost object, the following steps are followed.
2.1 Step 1: Identify the specific direct cost elements shared by various cost objects.
In this step, the focus is on the cost items such as direct labor, direct expenses or direct raw materials.
2.2 Step 2: Identify the cost objects which share the same direct cost.
Identify the cost objects which share the same direct cost. In this case, it can be two or more products in the same manufacturing organization or in the same department.
2.3 Step 3: Assess the degree of utilization of the economic resource (direct cost paid or incurred).
Assess the degree of utilization of the economic resource (direct cost paid or incurred) for each cost object.
2.4 Step 4: Assign weights on each cost object as you find fit.
Assign weights on each cost object as you find fit. For example, a case where a particular cost object consumes the largest amount of direct cost, it should be allocated the highest value (weight) and the cost object which consumes the least be assigned the lowest value (weight).
2.5 Step 5: Compute the overhead cost allocation ratio for each cost object.
Compute the overhead cost allocation ratio for each cost object. The following formula applies.
2.6 Step 6: Allocate the overhead cost from the General Ledger (GL) to every cost object.
EXAMPLE
Wap Wap ltd is a fruit juice processing project owned by youth in Minnesota, USA. The plant has got four (4) production lines, that is line 1; line 2; line 3 and line 4 and each line produce juice packed in half litres packets with different flavors.
The following are the production details for each line of production;
Required
- Determine the overhead cost allocated for each production line
- Determine the total production cost for each production line
Solution
Workings
