Accounting Best Practices, Fifth Edition

9–4. Assign Overhead Personnel to Specific Sub-Plants

One of the largest headaches for the cost accounting staff is determining what overhead costs are assigned to which products. Not only are these assignments subject to considerable personal interpretation, but also they can strongly impact the way management views the profitability of various products. For example, if the assignment is made to a product of overhead costs that are not related to its manufacture, storage, or use in any way, its costs will appear artificially high, and management may even stop manufacturing it on the false grounds that it is not profitable.

A possible solution is to divide the production area into sub-plants, each one assigned the task of manufacturing a subset of all company products. One can then assign most of the overhead personnel, such as buyers, shop supervisors, and materials handlers to specific sub-plants. By doing so, the cost accounting staff can much more easily allocate overhead costs to specific products. This approach meshes nicely with the activity-based costing concept previously discussed, since costs are more closely identified with specific products.

The trouble is the considerable effort required to reshuffle the production layout into sub-plants. Further, if sub-plants are too small, it may not be possible to assign staff full-time to just one sub-plant, forcing them to service several sub-plants at once, and reducing the efficiency of costing allocations.

Cost:

Installation ...