Direct costs are easy to 'attach' to an object. Say, a manufacturer is making widgets. They take 5 feet of lumber, two screws, and one ounce of purple paint and five minutes of labor. Its easy to measure the amount of lumber, etc. However, what about the property tax bill/expense? How much of this should be called an expense of the manufacturing division, the sales division, the general office division, the Human Resources division, etc. etc. ??? That's called an indirect cost. (which all businesses have)
There's the issue: Top management's goal for allocating indirect cost is to accurately measure the complete, true cost of this object. What is often the goal of the supervisor or division head when it comes to allocating indirect cost? How can management deal with this issue?
What is often the goal of the supervisor or division head when it comes to allocating indirect cost?
The supervisor or division head thinks the following about allocating indirect cost.
1. He doesn't like it because he doesn't control those costs. Part of being effective in managing production is to control and minimize the costs. Indirect costs are often pushed on his department with no explanation and no rationale for how they might have been allocated.
2. Allocation methods may not fairly apportion costs based on the way a division head would. There are various methods of allocation ...
In a 371 word solution, the questions are answered in detail.