How can you allocate overhead costs effectively when multiple films are involved?

1 Choose a method

There are several methods for allocating overhead costs to multiple films, depending on the level of detail and accuracy you need. The simplest method is to use a single plant-wide rate, which divides the total overhead costs by the total direct labor hours or costs of all films. This method is easy to calculate and apply, but it assumes that all films use the same proportion of overhead resources, which may not be realistic. A more refined method is to use multiple departmental rates, which divide the overhead costs of each department or function by the direct labor hours or costs of the films that use that department. This method is more accurate and fair, but it requires more data and calculations, and it may not capture the differences in overhead intensity among films within a department. The most complex method is to use activity-based costing (ABC), which assigns overhead costs to specific activities that generate them, and then allocates them to the films based on their consumption of those activities. This method is the most precise and relevant, but it is also the most costly and time-consuming, and it may not be feasible for all types of overhead costs.

2 Choose a base

The allocation base is the factor that links the overhead costs to the films, such as direct labor hours, direct labor costs, machine hours, or units produced. The choice of the allocation base depends on the nature of the overhead costs and the films, as well as the availability and reliability of the data. The allocation base should reflect the causal relationship between the overhead costs and the films, meaning that the more a film uses the overhead resources, the more it should be charged. For example, if most of the overhead costs are related to labor, then direct labor hours or costs may be a suitable base. However, if some films are more labor-intensive than others, or if the labor rates vary significantly among films, then direct labor hours or costs may not be a fair base. In that case, machine hours or units produced may be better alternatives. The allocation base should also be consistent and verifiable, meaning that it should be measured in the same way for all films and that it should be based on actual data rather than estimates or assumptions.

3 Avoid pitfalls

Overhead allocation can be prone to some common pitfalls and errors that can affect the accuracy and usefulness of the results. For instance, under- or over-allocating overhead costs can occur if the actual overhead costs or the actual allocation base differ from the budgeted or estimated ones; this can be avoided by periodically updating the overhead rate based on actual data or using a predetermined rate that adjusts for differences. Additionally, allocating fixed overhead costs based on variable factors, such as units produced, can distort profitability and performance of films; this should be avoided by using a fixed allocation base, such as direct labor hours or machine hours. Finally, it is important to only allocate overhead costs that are directly attributable to films or unavoidable/common to all films; allocating irrelevant or avoidable overhead costs, such as corporate overhead costs, may overstate costs and understate profitability.