overhead allocation
Overhead allocation refers to the process of distributing indirect costs—expenses not directly tied to producing a product or service, like utilities, rent, or administrative salaries—across various departments, products, or projects within a business. This ensures that each part of the organization accurately reflects its share of overall expenses. Properly allocating overhead helps in determining product pricing, assessing profitability, and making informed management decisions, ultimately enabling businesses to operate more efficiently and transparently by understanding the true costs of their operations.
Additional Insights
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Overhead allocation refers to the process of distributing indirect costs—like rent, utilities, and administrative salaries—across various products or services a business offers. These costs are not directly tied to any single product but are essential for running the business. By allocating these overhead costs, companies can determine the true cost of producing each product or service, helping them set prices, manage budgets, and ultimately improve profitability. This process ensures a clearer understanding of where money is spent and how to optimize operational efficiency.