On Allocation of Overheads.

The allocation of central overheads in a multi-product or multi-market enterprise can have a profound effect on the perceived financial performance of the individual products or markets. The paper describes alternative methods of allocating central overheads and an example is examined where two markets are supplied from two subsidiaries controlled by a central head office but where the subsidiaries have different cost structures from each other. The example serves to illustrate the consequences of overhead allocation methods and the way they can affect managerial efforts to control costs in order to protect sales and maintain a desired level of product/market profitability. This study highlights the need for management to pursue a critical appraisal of accounting conventions for allocating central overheads.