A survey of cost allocation practices of manufacturing companies in Kenya

Abstract

This study sought to survey how Kenyan manufacturing companies allocate their fixed overheads to products or departments. Cost allocation affects reported figures in the companies' financial statements and hence the decisions taken on the basis of those financial statements. Fifty companies were selected, and asked to fill a semi-structured questionnaire on their allocation method in terms of cost centers used, allocation base used, service department cost allocation methods, over head application rates and how they deal with under or over recovery of overheads. Response rate was 64 % of the surveyed companies. Data was analyzed using percentages, proportions and tables. Results indicate that cost allocation is practiced by majority of companies in Kenya. However, most companies still use traditional volume-based approach, which suggests that majority of companies, could be making serious mistakes in their decisions as noted in the literature that bad allocation lead to poor decisions. The most important reason for cost allocation noted by respondents is to provide information for managerial decision-making. On average, Kenyan manufacturing companies have two cost centers and majority of companies use units of outputs as their allocation base. Majority of companies use actual activity levels to determine an overhead application rate, and thus the problem of dealing with over or under recovery of overheads is not common in Kenya. The few companies that use budgeted activity levels; however, write- off over- or- under application of overheads through profit and loss account. Results of this study also indicate that Activity Based Costing has not been appreciated in Kenya.