Overhead allocation is the process of spreading overhead (indirect costs) back to certain jobs, products or cost centers. Use coca colas different productline like dasani water and powerade sports drink. How would you define the overhead accounts, and what method would you choose to use to allocate these accounts back to the job, product, or cost center? Discuss the method you have chosen and include some advantages and disadvantages of this method. How can the assignment of overhead costs affect operations and profit reporting?

Answer:

Overhead means indirect cost that need to be allocated on final product. If the cost is easily identify that this is relate to specfic product then it is direct cost and if cost cannot identify this is indirect cost and need to allocate on the all the products on suitable base. Example of Overheads is office rent it is fixed cost and all the production team member are seating in the office. So we can allocate/ apportioned overheads in this case on the product on the basis of headcount seating in the office. A company must pay overhead on an ongoing basis regardless of whether the company is doing a high or low volume of business. Overhead expense can be fixed , meaning they are the same from month to month or variable meaning they increase or decrease depending on the business activity level. For Example a business rent payment may be fixed while courier charges may be variable. Overhead expenses can also semi variable, meaning the the company incurs some portion of the expense no matter what and some portion depends on the level of business activity. Overhaed play into the overall profitability of the business. The company must account for overhead expenses to determine the net profit also referred to as the bottom line. So overhead affect the operations and profit reporting. The best method of overhead allocation is activity based costing in this first all cost transfer to cost pool and then on the basis of cost driver distributed on the all the product.