What is Volume-Based Allocation?

A volume-based allocation is an allocation of factory overhead costs based on a unit of activity, rather than a cost. An improved level of allocation accuracy can be achieved when several overhead cost pools are created, with the costs in each one being assigned using the most relevant basis of allocation.

Volume-Based Allocation Best Practices

The type of allocation chosen will usually depend on whether the underlying activity data are already being collected, since a new data collection method would incur an additional incremental cost. Businesses will typically take this approach to save money, even if a new allocation methodology might theoretically be considered to generate more accurate results.

Examples of Volume-Based Allocations

Examples of volume-based allocations are the amount of square footage used, the number of labor hours used, the number of machine hours used, and the number of units produced. Another option is to allocate costs based on the sales generated by each product, product line, geographic region, or division - essentially, anything that generates sales.