Strategic Management Accounting

Running head: STRATEGIC MANAGEMENT ACCOUNTING
Strategic Management Accounting
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1STRATEGIC MANAGEMENT ACCOUNTING
Table of Contents
Answer to question 4:......................................................................................................................2
References and bibliography:..........................................................................................................6

2STRATEGIC MANAGEMENT ACCOUNTING
Answer to question 4:
Overhead costs are those expenses, which are not directly traceable with the respective
cost unit. It includes indirect materials, indirect labor and any other indirect expenses, which are
not directly linked with the volume of production. It needs to be allocated to various cost units
and cost centers based on certain overhead allocation basis to ascertain total cost of any product.
There are two methods for overhead allocation, one is traditional method or the volume based
overhead allocation system and the other is activity based overhead allocation system (Jasinski,
Meredith & Kirwan, 2015).
Under traditional or volume based overhead allocation system, a plant wide or
departmental overhead rate is determined based on the expected total labor hour or machine hour
and the expected total overhead expenses, and based on the usage of labor hour or machine hour
the overhead is applied to the different cost centers. It only considers a single activity to allocate
the overhead cost. Demerit of this system is that, this is not rational or logical. Irrespective of
usage of various activities, which varies in different cost centers, it just uses only one activity to
allocate the overhead costs.
Activity based costing system is a modern and scientific and more rational system of
allocating the total overhead costs among the various cost centers. Under this system, key
activities are identified and the overheads related to those activities are also ascertained, then the
cost per activity is calculated dividing the activity costs by volume of activity. All those activity
rates are used to calculate the total overheads to be allocated for a product or cost center
(Jasinski, Meredith & Kirwan, 2015).