By means of the cost allocation method in table form – one of many cost accounting instruments – it is possible to spread overhead costs across all cost centers. This practice also requires a highly cost-reflective breakdown of overhead types. In the following example, overheads such as salary, rent, and insurance were broken down in the following manner:
- Employee salaries according to their respective cost centers
- Rental costs according to the surface used (sq. m.) of respective cost centers
- Employee insurance costs according to their respective cost center
Example: calculating the overhead rate by means of the cost allocation method
For a good understanding of the entries from the cost allocation method of calculation, let’s stick to one cost center only: the material overheads costs. There are a total of 8 employees – those from the purchase department, the incoming goods warehouse, and those who inspect the incoming goods. Employees receive a monthly salary of $2,500, which amounts to the total overhead cost of $20,000. The monthly insurance cost of each employee amounts to $500, resulting in the total insurance cost of $4,000. Warehouse rental is $6,000.