Basing overhead allocation solely on volume

Question

Quizplus · Accepted Answer

Basing overhead allocation solely on volume will lead to undercosting high-volume products and overcosting low-volume products. This is because high-volume products will consume more overhead resources, but if the overhead allocation is solely based on volume, then low-volume products will also be allocated the same amount of overhead as high-volume products, resulting in overcosting of low-volume products. This method is not the sole basis of the activity-based costing model, which takes into account other factors such as the complexity and diversity of activities.

Basing Overhead Allocation Solely on Volume