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

Here are several examples of volume-based allocations:

Machine hours allocation. Costs such as depreciation, maintenance, or energy for manufacturing equipment are allocated to products based on the number of machine hours each product uses.
Labor hours allocation. Overhead costs like supervisor salaries, utilities, or rent are allocated based on the number of labor hours worked.
Units produced allocation. Costs such as quality inspection or setup costs are allocated based on the number of units produced.
Direct materials used allocation. Costs such as purchasing department salaries or inventory handling are allocated based on the volume of direct materials consumed.
Sales volume allocation. Marketing or distribution costs are allocated based on the number of units sold or the revenue generated.
Shipping weight allocation. Transportation or logistics costs are allocated based on the total shipping weight of products.
Order volume allocation. Order processing costs or packaging expenses are allocated based on the number of orders processed.