What are the different methods for allocating indirect costs to products in cost accounting?

Methods for Allocating Indirect Costs to Products in Cost Accounting

Allocating indirect costs to products is an essential aspect of cost accounting, as it helps in determining the true cost of production. There are several methods commonly used for allocating indirect costs to products:

1. Activity-Based Costing (ABC): This method assigns indirect costs to products based on the activities that drive those costs. It provides a more accurate reflection of the actual resources consumed by each product.
2. Direct Labor Hours: Some companies allocate indirect costs based on the number of labor hours expended on producing each product. This method assumes that indirect costs are directly proportional to labor hours.
3. Machine Hours: For manufacturing companies, indirect costs can be allocated based on the machine hours used in producing each product. This method is suitable when machines drive a significant portion of overhead costs.
4. Percentage of Direct Labor Costs: Another method is to allocate indirect costs based on the percentage of direct labor costs incurred in producing each product. This is a simple and commonly used method for cost allocation.

Each method has its advantages and limitations, and companies may choose the most appropriate method based on their specific operational needs and cost structure.