Question: Keep in mind that accounting for indirect manufacturing costs typically requires allocating overhead using predetermined overhead rates. Why do managers insist on allocating overhead costs?

Expert answer

There are a few key reasons why managers allocated overhead costs, even though it can be difficult to do so accurately. First, allocating overhead allows managers to see the full cost of producing each product or service. This information is important for making decisions about pricing, product mix, and other strategic issues. Additionally, allocating overhead helps managers identify which products or services are more profitable and which ones are costing the company money. Finally, allocating overhead is required for financial reporting purposes. In order to produce accurate financial statements, all manufacturing costs must be included.

Despite the importance of allocating overhead costs, there are a few challenges that can make it difficult to do so accurately. First, it can be difficult to identify all of the indirect costs that should be included in overhead. For example, some costs may be indirect for one product but direct for another. Additionally, the amount of overhead can vary greatly from one period to the next, making it difficult to predict how much overhead will need to be allocated. Finally, overhead allocation methods are often complex and time-consuming to implement.