Q. 13RQ - Horngren'S Financial And Managerial Accounting

Question

What is an allocation base? Give some examples

Step-by-Step Solution

Answer

The allocation base is the denominator that links the overhead costs to the products. Ideally, the allocation base is the primary cost driver of manufacturing overhead. Direct labor hours, machine hours, direct labor cost are the examples of the allocation base.

Step 1: Machine hours

Machine hours is a measurement used to apply the overheads to the manufactured goods of the company. It is the method of absorption of the overheads incurred by the company.

Step 2: Allocation base

Allocation base is define as the denominator used while computing the predetermined overhead allocation rate. It divides the total overhead cost on per unit basis. Machine hours, labor hours can be used as the allocation base.