Answer to Question #125624 in Accounting for Relebogile

Question

The trational methods of cost allocation, cost apportionment and absorption into products are being challenged by some writters who claim that much information given to management is misleading when these methods of dealing with fixed overheads are used to determine product costs.
You are required to explain what is meant by cost allocation costs apportionment and absorption and to describe briefly the alternatives approach of activity-based costing in order to ascertain total product costs.

Answer 1

Cost allocation means the process of overhead distribution to several departments or cost centers proportionately on an equitable basis. Cost absorption in a product is the process of the overhead of a cost center or department to different cost units or products. Cost apportionment means a distribution of expenses over multiple departments in proportions to the cost unit or cost center.

Activity-based costing is an alternative approach to product costing, that is a form of absorption costing, which first allocates overheads to cost pools before absorbing them into units using cost drivers. This is a more complex form of cost allocation than product-based costing.