Allocation of Indirect Costs of a Corporation
Direct costs are easy to 'attach' to an object. Say, a manufacturer is making widgets. They take 5 feet of lumber, two screws, and one ounce of purple paint and five minutes of labor. Its easy to measure the amount of lumber, etc. However, what about the property tax bill/expense? How much of this should be called an expense of the manufacturing division, the sales division, the general office division, the Human Resources division, etc. etc. ??? That's called an indirect cost. (which all businesses have)
There's the issue: Top management's goal for allocating indirect cost is to accurately measure the complete, true cost of this object. What is often the goal of the supervisor or division head when it comes to allocating indirect cost? How can management deal with this issue?