Cost Management: A Strategic Emphasis 5th Edition by David Stout, Edward Blocher, Gary Cokins

Exercise 20

Explain why a costing system that uses a volume-based rate is likely to produce distorted product costs.

Step 1 of 3

Volume Based Overhead rate:

Overhead rate is the rate at which indirect expenses are allocated to the products to arrive at the total cost related to that product. Overhead rate is used because indirect expenses cannot be directly attributable to products.

In volume based overhead rate all the indirect expenses are allocated on the basis of the proportion of volume. Point to note here is that proportion is based on direct labor, machine hour, unit of products etc.