Allocation of factory overheads, administration costs and a profit

Manufacturing overheads are those costs that cannot be directly allocated to a specific product.  Manufacturing overheads can be allocated on various methods to the different products.  The following are some of the methods that can be used to allocate manufacturing overheads:

  • Units produced
  • Direct labour hours worked
  • Cost of direct labour
  • Machine hours
  • Cost of direct material
  • Primary cost basis (Budgeted direct labour hours plus budgeted direct material costs)
  • Combination of above-mentioned methods 

To calculate the profit of a business the return on investment method could be used.  This method implies that the total investment (Total capital) is multiplied by a reasonable return on investment. 

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