Manufacturing overhead is allocated on the basis of

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Manufacturing overhead can be allocated on the basis of machine hours, direct labor hours or direct labor costs. It is common for a company to use a combination of these methods to allocate overhead. Allocating overhead based on machine hours is suitable when the use of machine is the primary way to produce a product. On the other hand, allocating overhead based on direct labor hours is suitable if the use of labor is the primary way to produce a product. Allocating overhead based on direct labor costs is suitable if there is a high correlation between labor costs and overhead costs. Using all three methods can provide a more accurate allocation since each method captures a different aspect of overhead costs.

Manufacturing Overhead Is Allocated on the Basis of