Definition of Overhead allocation

Overhead allocation

The process of spreading production overhead equitably over the volume of production of goods or services.

Asset allocation decision

The decision regarding how an institution's funds should be distributed among the
major classes of assets in which it may invest.

Capital allocation

decision allocation of invested funds between risk-free assets versus the risky portfolio.

Dynamic asset allocation

An asset allocation strategy in which the asset mix is mechanistically shifted in
response to -changing market conditions, as in a portfolio insurance strategy, for example.

Policy asset allocation

A long-term asset allocation method, in which the investor seeks to assess an
appropriate long-term "normal" asset mix that represents an ideal blend of controlled risk and enhanced
return.

Tactical Asset Allocation (TAA)

An asset allocation strategy that allows active departures from the normal
asset mix based upon rigorous objective measures of value. Often called active management. It involves
forecasting asset returns, volatilities and correlations. The forecasted variables may be functions of
fundamental variables, economic variables or even technical variables.

Allocation base A measure of activity or volume such as labour

hours, machine hours or volume of production
used to apportion overheads to products and
services.

Non-production overhead

A general term referring to period costs, such as selling, administration and financial expenses.

Overhead

Any cost other than a direct cost – may refer to an indirect production cost and/or to a non-production expense.

Overhead rate

The rate (often expressed per hour) applied to the time taken to produce a product/service, used to allocate production overheads to particular products/services based on the time taken. May be calculated on a business-wide or cost centre basis.

Production overhead

A general term referring to indirect costs.

overhead costs

overhead generally refers to indirect, in contrast to direct,
costs. Indirect means that a cost cannot be matched or coupled in any
obvious or objective manner with particular products, specific revenue
sources, or a particular organizational unit. Manufacturing overhead
costs are the indirect costs in making products, which are in addition to
the direct costs of raw materials and labor. Manufacturing overhead
costs include both variable costs (electricity, gas, water, etc.), which vary
with total production output, and fixed costs, which do not vary with
increases or decreases in actual production output.

allocation

the systematic assignment of an amount to a recipient
set of categories annuity a series of equal cash flows (either positive or negative) per period

applied overhead

the amount of overhead that has been assigned to Work in Process Inventory as a result of productive activity; credits for this amount are to an overhead account

approximated net realizable value at split-off allocation

a method of allocating joint cost to joint products using a
simulated net realizable value at the split-off point; approximated
value is computed as final sales price minus
incremental separate costs

cost allocation

the assignment, using some reasonable basis,
of any indirect cost to one or more cost objects

fixed overhead spending variance

the difference between the total actual fixed overhead and budgeted fixed overhead;
it is computed as part of the four-variance overhead analysis

fixed overhead volume variance

see volume variance

net realizable value at split-off allocation

a method of allocating joint cost to joint products that uses, as the proration base, sales value at split-off minus all costs necessary
to prepare and dispose of the products; it requires
that all joint products be salable at the split-off point

overapplied overhead

a credit balance in the overhead account
at the end of a period; when the applied overhead
amount is greater than the actual overhead that was incurred

overhead

any factory or production cost that is indirect to
the product or service; it does not include direct material
or direct labor; any production cost that cannot be directly
traced to the product

overhead application rate

see predetermined overhead rate

overhead efficiency variance

the difference between total budgeted overhead at actual hours and total budgeted
overhead at standard hours allowed for the production
achieved; it is computed as part of a three-variance analysis;
it is the same as variable overhead efficiency variance

overhead spending variance

the difference between total actual overhead and total budgeted overhead at actual
hours; it is computed as part of three-variance analysis; it
is equal to the sum of the variable and fixed overhead
spending variances

physical measurement allocation

a method of allocating a joint cost to products that uses a common physical characteristic as the proration base

predetermined overhead rate

an estimated constant charge per unit of activity used to assign overhead cost to production or services of the period; it is calculated by dividing total budgeted annual overhead at a selected level of volume or activity by that selected measure of volume or activity; it is also the standard overhead application rate

sales value at split-off allocation

a method of assigning joint cost to joint products that uses the relative sales values of the products at the split-off point as the proration basis; use of this method requires that all joint products
are salable at the split-off point

standard overhead application rate

a predetermined overhead rate used in a standard cost system; it can be a separate variable or fixed rate or a combined overhead rate

total overhead variance

the difference between total actual overhead and total applied overhead; it is the amount of underapplied or overapplied overhead

underapplied overhead

a debit balance in the overhead account at the end of a period; when the applied overhead amount is less than the actual overhead that was incurred

variable overhead efficiency variance

the difference between budgeted variable overhead based on actual input activity and variable overhead applied to production

variable overhead spending variance

the difference between total actual variable overhead and the budgeted amount of variable overhead based on actual input activity

Allocation

The process of storing costs in one account and shifting them to other
accounts, based on some relevant measure of activity.

Factory overhead

All the costs incurred during the manufacturing process, minus the
costs of direct labor and materials.

Fixed overhead

That portion of total overhead costs which remains constant in size
irrespective of changes in activity within a certain range.

Indirect cost

A cost that is not directly associated with a single activity or event. Such
costs are frequently clumped into an overhead pool and allocated to various activities,
based on an allocation method that has a perceived or actual linkage between
the indirect cost and the activity.

Proration

The allocation of either under- or over-allocated overhead costs among the
work-in-process, finished goods, and cost of goods sold accounts at the end of an
accounting period.

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