Question

Choosing among alternative cost allocation methodologies typically is based on one of the Following criteria: cause-and-effect, benefits derived, fairness, or ability to bear Discuss how the “Fairness” criterion can be used in selecting a cost allocation methodology.

Answer 1

The “Fairness” criterion can be used in selecting a cost allocation methodology, when overhead is allocated to the production process or product on the basis of the criteria used in. It should be reasonable according to the selling price of the products which is charged to the customer. The factor of allocation involved in the process of allocation of the overhead should be fair according to the consumption by the product. If the factor of allocation is less utilized in the product production, then less cost is allocated and vice-versa. The over and under allocation of overhead to any product makes it less and more profitable against the other products. If less labor hours are consumed in the production of the Product A in comparison of Product B, then less overhead cost is allocated to the Product A to that of Product B.