The Alternative to Overhead Allocation

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ACC202 - Managerial Accounting

18 April 2009

The Alternative to Overhead Allocation

Goal congruence is the consistency or agreement of actions with organizational goals (AllBusiness . An important element underlying this principle is that goals set by top management are susceptible to distortion as it passes through the communication channels to the front line employees (Schaffer . Hence , the role of middle management as recipient and transmitter of the company targets is vital in achieving goal congruence . Should the branch managers of Creative

Consumers Consultants , Ltd (CCC , who are currently enjoying a high level of independence ever put their personal interests ahead of that of the company , a goal incongruence would result

The non-allocation of non-traceable costs to the branches provides for better goal congruence . First , it more accurately reports the profitability of the segments . Also , it reduces the potential conflict of interests of the branch managers

Arbitrarily allocating the non-traceable costs is often justified on the ground that common costs have to be covered but this is not necessarily achieved by doing so . It may make an otherwise profitable segment appear to be unprofitable which might lead to its erroneous elimination that then results to the reduction of the overall profits to cover the common costs which is still there (Garrison , 565 . For instance , the Paris office , which operated under a loss of 1 million when charged with its share of non-traceable costs yielded a profit of 3 million (Figures 1 2 . Since the...