Why may departmental overhead rates NOT correctly assign overhead costs?
A) Because of the use of direct labour hours in allocating overhead costs to products rather than machine time or quantity of materials.
B) Because of the high correlation between direct labour hours and the incurrence of overhead costs.
C) Because of the over-reliance on volume as a basis for allocating overhead costs where products differ regarding the number of units produced, lot size, or complexity of production.
D) Because of the difficulties associated with identifying cost pools for the first stage of the allocation process.

Question

Quizplus · Accepted Answer

The over-reliance on volume as a basis for allocating overhead costs where products differ regarding the number of units produced, lot size, or complexity of production may result in incorrect allocation of overhead costs. Other factors such as machine time or quantity of materials may be more appropriate to use. A) is incorrect because direct labour hours may be a valid basis for allocating overhead costs in some situations. B) is incorrect because high correlation between direct labour hours and the incurrence of overhead costs would actually support the use of direct labour hours in allocating overhead costs. D) is incorrect because identifying cost pools is a necessary step in the allocation process but does not necessarily result in incorrect allocation if done properly.

Why May Departmental Overhead Rates NOT Correctly Assign Overhead Costs