How To Allocate Production Overhead Costs

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Allocating Manufacturing Overhead Costs plus ABC Costing Examples and Templates

How To Allocate Production Overhead Costs: Under the recognized accounting concepts or GAAP – production overhead should be allocated to every unit created. Production overhead is costs that are associated with the production of goods that cannot be instantly allocated to specific unit or product. For example the expense of raw materials used in production can be easily tracked and allocated per unit produced but not the overhead costs.

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Products within this category could involve power used in the manufacturing plant and maintenance of the equipment, the rent paid as well as the depreciation. Allocating those costs could assist managers establish the profits of every product which are produced so they could decide on pricing, growth or elimination of the products.


how to allocate production overhead costs


Try to come up with the list of most types of production overhead in your company. Total the overhead costs included in every category throughout the period of time. For instance, if the producer creates 2 products and one product will take 5 hours labor as some other item will take 45 hours labor, next ten percent of production overhead can be allocated to 1st product and 90 percent can be allocated to the 2nd product.

Activity based costing will help you use this approach to allocate your overhead or indirect costs appropriately. This is very important for you to be able to track the profitability of each product and service delivered by your business.

ABC costing lets you to get more precise recognition of particular costs included within the production process to every product created during certain period of time. In addition, list all the related activities included within the production process. For instance, labor, equipment hours, quality control, inspection, maintenance and product pilot testing.

Allocate the costs recognized by each production overhead group in to every activity within the production process. Now, establish the share of every activity into the manufacturing process based on the demand for every product produced. For instance, batch production equipment should be set up for every manufacturing batch. When a product needs four setups in an interval while product Z needs only one, next you can accurately assign 80 percent of your total set up costs to the product X and 20 percent to the product Z.


Activity based costing in Excel
ABC for Excel


Learn more about how ABC Costing or activity based costing works and see how it can help your business. Use the ABC for Excel tool to automatically allocate your manufacturing overhead costs based on your own determined criteria customized for your organization.


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