Advantages And Disadvantages Of Plant-Wide Allocation Methods

Plant-wide allocation method - method of allocating costs that uses one cost pool, and therefore one predetermined overhead rate, to allocate overhead costs.
Departmental allocation method – is very similar to a plant-wide allocation method, however in this method one cost is allocated to a particular department.
Activity-based costing (ABC) method was created in 1980s. It uses several cost pools, organized by activity, to allocate overhead costs in contrast to previously popular models of allocation of overhead, e.g. plant wide allocation uses one cost pool for the whole plant, and department allocation uses one cost pool for each department (K.Heisenberg, J.B.Hoyle, n.d.).
Let’s have a look at five basic steps used in activity-based costing:

Step 5: Allocate overhead costs to products.
The activity costs should be absorbed back into the individual products by multiplying the predetermined overhead rate for each activity by the level of cost driver activity used by the product
Total activity costs can them be added to labour and material costs as normal.
Now, let’s briefly consider main advantages and disadvantages of ABC
Advantages:
ABC provides a more accurate cost per unit. As a result, pricing, sales strategy, performance management and decision making should be improved.
It provides much better insight into what drives overhead costs.
ABC recognises that overhead costs are not all related to production and sales volume.
In many businesses, overhead costs are a significant proportion of total costs, and management needs to understand the drivers of overhead costs in order to manage the business properly. Overhead costs can be controlled by managing cost drivers.
It can be applied to derive realistic costs in a complex business environment.
ABC can be applied to all overhead costs, not just production overheads.
ABC can be used just as easily in service costing as in product

The choice of both activities and cost drivers might be inappropriate.
ABC can be more complex to explain to the stakeholders of the costing exercise.
The benefits obtained from ABC might not justify the costs.
Other systems may need to be changed - for example, how variances are calculated.
The example of activity-based allocation method of overhead costs is any production company that simultaneously produces different types of goods that have different rates of overhead costs.
An activity-based cost pool can be defined as a collection of overhead costs, typically organized for a particular activity or groups of individual costs influenced by the same cost drivers, which are activities that control the amount of costs incurred.
Prevention costs are costs incurred to prevent defects in products and services. Examples include designing production processes that minimize defects, providing quality training to employees, and inspecting raw materials before they are placed in production.
Appraisal costs (so-called detection costs) are costs incurred to detect defective products before they are delivered to customers. The cost of finished goods inspections falls in this