Overhead Cost Allocation

Overhead cost allocation refers to the process of distributing indirect costs—expenses not directly tied to a specific product or service, like utilities, rent, and salaries of support staff—across different departments or products. It ensures that each area or product reflects a fair share of these costs, which helps businesses understand true profitability. By using methods like percentage of sales or square footage, companies can more accurately assess how much each product contributes to overall costs and helps in making informed pricing and budgeting decisions.