Departmental overhead rates applied on the basis of a volume measure such as direct
labour-hours or machine-hours will eliminate any distortions in unit costs due to product diversity.

Question

Quizplus · Accepted Answer

Departmental overhead rates based on a volume measure such as direct labor-hours or machine-hours can still cause distortions in unit costs due to product diversity. This is because different products may use different amounts of indirect resources and the same amount of direct labor or machine-hours. To address this, activity-based costing (ABC) may be a more accurate method of assigning overhead costs to products based on the specific activities that drive the costs.

Departmental Overhead Rates Applied on the Basis of a Volume