Question

What benefits, if any, does Polysar gain by allocating its overheads on the basis of "Demonstrated Capacity"?

Answer 1

Answer:

The following are the benefits:

1. Ability to bear running and recurring costs;
2. Efficiency of production

Explanation:

The practice of distributing indirect costs to revenue-generating projects is being referred to as overhead allocation.

The overhead is determined by the sum of indirect labor and incurred expenses. This can be represented by 25% - 50% of the expenses incurred by a firm.

In details the benefits of allocating based on Demonstrated Capacity are the following:

1. Waste and defects would be controlled during production;
2. While the market is highly volatile and competitive it becomes easier to make accurate pricing;
3. A firm in a multi-product business will be able to evaluate the profit margin of each product;
4. This can help the management in decision making especially when the cost information is being supplied;
5. You can easily evaluate the effectiveness of a department;
6. It helps you to fix the price of a product