Accounting: Tools for Business Decision Making, 5th Edition

Published by Wiley
ISBN 10: 1118128168
ISBN 13: 978-1-11812-816-9

Chapter 17 - Activity-Based Costing - Questions: 2

Answer

The use of direct labor hours or costs as the main basis for allocating overhead cost to products has fallen out of favor recently. This is because as businesses and automated manufacturing techniques become more advanced the actual usage of direct labor has decreased while the use of machine hours has increased. The use of direct labor hours or costs as the basis for allocating overhead is only valid when it is the most relevant factor that has a direct effect on the resources consumed. The use of direct labor hours or costs as the basis for allocating overhead is only valid when it is the most relevant factor that has a direct effect on the resources consumed.

Work Step by Step

The allocation of overhead should always be based on the most direct connection to its usage. This will result in the most accurate allocation of overhead costs.
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