The Differences Between Traditional Volume-Based & Activity-Based Overhead Cost Allocation Systems
Understand the differences between Traditional Volume-Based & Activity-Based overhead-cost allocation systems to enhance your business operations and create more accurate balance sheets. You need a strategic way to calculate how much profit your products and services are generating in relation to overhead costs. Each cost-allocation system has its benefits and shortfalls. Therefore, it is always important to consult with a seasoned accounting professional who can help you to choose the best possible system for bettering your business model.
Our accounting firm works with manufacturing clients whose profitability depends upon the ability to understand, control, and improve upon their production costs. Our firm makes it a priority to implement the cost-allocation system that paints the clearest possible picture of whether or not operations are sound.
How the Traditional Volume-Based method for Cost-Allocation works:
- Uses a single activity base such as direct labour or machine hours
- Looks at the cumulative overhead costs for an entire order rather than analyzing the individual steps in a production process
- Divides the total overhead cost by the total direct labour dollars/hours it cost to produce that order
- This method is easy to implement, but fails to capture product costs when amongst a more complicated product mix.
How the Activity-Based Costing System works:
- Evaluates the cost of each process in the production line by identifying major activities and dividing the overhead costs into activity pools.
- Once a cost has been assigned to each activity, a cost driver such as machine hours or labour, is identified within each activity cost pool.
- This process is more complex, but it is also more accurate
Accurately evaluating the effective allocation of overhead expenses is essential to pricing your business products. Leveraging an Activity-Based costing system gives you a better idea regarding the sustainability of your business model and product pricing. Our accounting team will use this calculation to evaluate your operations and to make suggestions that will control costs and improve your profit margins
Working with our team helps you to foresee an operational bottleneck before it impacts your bottom-line. Hogg, Shain & Scheck works with our corporate clients year-round to ensure that no costly surprises arise during corporate reports and tax time. Collaborate with our accountants to increase efficiency throughout the year, so that your company can continue to flourish. We adopt the responsibility of staying on top of accounting trends that will affect your profitability.
Our accounting team will keep you well informed and operating efficiently, so that your enterprise secures success. If you want an accounting team that you can count on to integrate themselves with your business, then contact Hogg, Shain & Scheck today. Our team will help you to be strategic, accurate, and aware so that you can continue to create innovation for years to come.