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A client that has been allocating Overhead just based on Square Footage in the Plant and...

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Accounting

A client that has been allocating Overhead just based on SquareFootage in the Plant and office. For example, if the purchasingdepartment uses 100 square feet to a total of 1000 sq feet, theywill get 10% of overhead allocated to the purchasing department. Arecently added employee discussed ABC accounting for overheadallocation. My question is, what might be one advantage over all ofthe new work required? The costs do not change.

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3.8 Ratings (399 Votes)
The biggest disadvantage of allocating overhead on the basis of traditional costing is that the allocation may be on some arbitrary basis without direct causeandeffect relationship between the cost and the cost centerThis leads to distortion of cost informationie    See Answer
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A client that has been allocating Overhead just based on SquareFootage in the Plant and office. For example, if the purchasingdepartment uses 100 square feet to a total of 1000 sq feet, theywill get 10% of overhead allocated to the purchasing department. Arecently added employee discussed ABC accounting for overheadallocation. My question is, what might be one advantage over all ofthe new work required? The costs do not change.

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