The Practicability of Traditional Method of Overhead Allocation: A Case of Limited Liability Company in Developing Economy

Abstract

Practical capacity method of production overhead allocation is the most accepted and most widely used method of cost accounting in manufacturing concern. However, traditional cost accounting has been criticized for cost distortion and lack of relevance during the last 20 years. Notwithstanding the criticisms, some firms in Ghana are still using the traditional method of overhead allocation. The primary purpose of this descriptive study was to examine how the company applies traditional method to allocate production overhead cost into the cost of its finished product.  The study did not find much difference between how the company adopts the practical capacity method of overhead allocation in terms of its concepts and application and what pertains in the existing literature on the phenomenon, except in some few aspects of its practice. It was also found that the company does not at all times meet the requirements of IFRS-IAS 2.

Key words: practical capacity, production overheads, allocation variance, overheads allocation rate (OAR)