Question

When you are allocated (charged) indirect costs, there should be some basis. For example, if we are to allocate electric costs between the Accounting and Finance classes, we split the electric bill based on class hours, not the number of students. The logic is that if we stay in the classroom longer, we use electricity more. No matter how many students there in the classroom, the electric cost will not be affected. Nowadays, with much automation of production process, direct labor does not seem to be a good basis for allocating (splitting) indirect costs. Overhead cost incurrence and direct labor have little relationship each other. However, many Japanese companies still use direct labor as their basis for allocating (splitting) indirect costs among different segments. What could be the reason? (This question has to do with strategy, like Question k in Section 1.)

Answer 1

Japanese companies may still use direct labor as a basis for allocating indirect costs due to their strategic considerations and the importance they place on labor in their production processes.

Step-by-step explanation:

Allocating indirect costs is a common practice in many companies, and the basis for allocation can vary depending on the objectives of the company. While direct labor may not seem like a suitable basis for allocating indirect costs, some Japanese companies still use it. One possible reason for this is that they prioritize the importance of labor in their production processes.

Using direct labor as a basis for allocating indirect costs may be a strategic decision for Japanese companies. They might consider labor as a key driver of their costs and use this allocation method to align their cost structure with their production processes. It could also be a way to incentivize efficient use of labor.