The method of indirect cost allocation in a management accounting system

Managers need information to fulfil their responsibilities. These information needs may be financial in nature or they may involve nonfinancial data such as number of hours worked, product or service throughput time, or units of product produced and sold. All management decisions should be supported by analyses of alternative courses of action. The management accounting is expected to supply the information for such decisions. One important reason for having a management accounting system is to determine the cost of manufacturing an individual product or batch of products. Such management accounting differ widely from one company to another, but each system is designed to provide information that management believes is important. In the past ten years, a growing body of academic and profession opinion hold the view that the traditional system of assigning overheads provides distorted costing. This arises due to the simplistic definition of fixed and variable cost and the recover of overheads based on broad apportionment bases often on volume based, e.g. payroll costs. In this article one new method of costs allocation is suggested.