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What is the major weakness of the traditional method of allocating factory overhead?

Economics Finance
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Question ajoutée par SHAHZAD Yaqoob , SENIOR ACCOUNTANT , ABDULLAH H AL SHUWAYER
Date de publication: 2016/08/02
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SHAHZAD Yaqoob
par SHAHZAD Yaqoob , SENIOR ACCOUNTANT , ABDULLAH H AL SHUWAYER

What is the major weakness of the traditional method of allocating factory overhead?

Zaheer uddin Raja
par Zaheer uddin Raja , Accounts Supervisor , Pakistan International Airlines

Unfair cost allocation to different products leading to suboptimal pricing (and other strategic) decisions leading to competitive disadvantage...

Solution is to follow Activity Based Costing method under which costs are allocated to each unit according to various activities (cost drivers) consumed by that unit.

The benefit should outweight the cost of implementing ABC.

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