Allocating overhead prices to departments primarily based on their particular useful resource consumption usually results in extra correct product costing. For instance, a division closely reliant on equipment would take up a bigger share of manufacturing unit overhead associated to tools upkeep than a division primarily centered on handbook labor. This refined value allocation supplies a extra exact understanding of the true value drivers inside every division.
This improved precision provides a number of benefits. It permits for extra knowledgeable pricing selections, as companies can higher perceive the profitability of particular person services or products. Moreover, it allows simpler value management by highlighting areas of potential inefficiency inside particular departments. Traditionally, less complicated strategies like making use of a single, plant-wide overhead charge usually obscured these nuances, resulting in probably distorted value info and fewer efficient administration selections.
