While direct materials and direct labour can be allocated to the product or service that represents the output of these inputs, deciding how the organisation’s overheads should be allocated is more challenging. Overhead allocation and absorption is the process of distributing the fixed costs that are not product-related to the goods or services produced by the business. For example, supposing the business has a legal team that protects intellectual property: how should their cost be allocated across the range of products the business produces? Overhead allocation in businesses with high fixed costs can significantly affect product pricing, and buyers should always try to understand the basis on which their suppliers have allocated costs. See also Costing, Activity Based.
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Discover the world’s largest Glossary of Procurement terms
With over 800 Procurement specific terms (and growing) you will find everything you need to know or thought you knew about the Procurement function. Our aim is to provide you with a comprehensive list collated from the Comprara Groups hub of training and procurement consulting source materials.The Procurement Glossary has been compiled by industry expert Paul Rogers.
