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Department A has 1,000 square feet and Department B has 2,000 square feet. Assuming an allocation rate of $0.50 per square foot, how much cost should be allocated to Department A?

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jepessoa

Answer:

$500

Explanation:

If allocation rate is $0.50 per square foot and department A has 1,000 square feet = $0.50 x 1,000 = $500

Overhead costs are indirect or fixed costs, that means that they are costs that are not directly associated to the manufacturing or production processes nor the sales and distribution processes.

Generally overhead costs are allocated based on direct labor hours or machine hours, but they can actually allocated using different basis, e.g. a warehouse can allocate overhead costs based on area.  

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