Charging to Profit and Loss Account

According to this method administrative
overheads are charged to Costing Profit & Loss Account. The reason for charging to
Costing Profit & Loss are firstly, the administrative overheads are concerned with the
formulation of policies and thus are not directly concerned with either the production or
the selling and distribution functions. Secondly, it is difficult to determine a suitable basis
for apportioning administrative overheads over production and sales departments. Lastly,
these overheads are the fixed costs. In view of these arguments, administrative
overheads should be charged to Profit and Loss Account.
Disadvantages :
(1) Cost of products are understated as administrative overheads are not charged to
costs.
(2) The exclusion of administrative overheads from cost of products is against sound
accounting principle.