The Essentials of Finance and Accounting for Nonfinancial Managers, 2nd Edition

CHAPTER EIGHTOverhead Allocations

Corporations are required by generally accepted accounting principles to allocate (mathematically distribute or apportion) their overhead expenses to individual profit centers when they prepare their information for the Internal Revenue Service (absorption accounting in LIFO/FIFO calculations), the Securities and Exchange Commission, and certain industry-specific regulatory authorities. There are numerous criteria that may be used for this calculation, including revenue, direct cost, units produced, direct labor dollars or hours, and square footage consumed.

It is often presumed, incorrectly, that the methodology that must be used for regulatory compliance is also appropriate for intelligent management decision ...