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department, product, activity, or other object to be costed
(without distinction, costing unit). Because overhead costs are
not identifiable with a costing unit, some process is necessary
to allocate overhead among costing units:
Distinctions between overhead costs and direct
costs rest upon the methods of measuring unit costs.
Direct costs can be identified with units to be costed
(i.e., with departments, activities, orders, products)
at the time the cost is incurred. This is accomplished
by measuring quantities of materials and hours of labor
used for each costing unit. * * *
Overhead costs cannot, as a practical matter, be
traced directly to individual costing units, either
because the process of making direct measurements is
judged wasteful or because there is no acceptable
method of direct measurement available. As an example
of a too costly measurement, electric power used by
each department in a factory can be measured, but this
is not always done because management does not wish to
incur the expense of meters and records. Examples of
the lack of a method of distribution may be observed in
any endeavor to determine how much of the cost incurred
for plant protection, accounting, or the president’s
office applies to each unit of production.
Id. at 367. As other authorities on accounting state: “Indirect
expenses, by their very nature, can be assigned to departments
only by a process of allocation.” Meigs et al., Accounting, The
Basis for Business Decisions 820 (4th ed. 1977).
Although such process of allocation undoubtedly involves
many judgments and uncertainties, there are certain standards:
Accounting literature is generally consistent in
stating that indirect costs should be charged against
operations as incurred if they have no arguable cause-
and-effect relationship with future revenues (such as
the salary of a mailroom clerk). However, many
allocations of indirect costs affect future periods; an
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