Direct labor is sometimes the appropriate basis for assigning overhead cost to products. It is appropriate to use direct labor when which of the following is true?
(1) Direct labor constitutes a significant part of total product cost.
(2) A high correlation exists between direct labor and changes in the amount of overhead costs.
A) (1) only
B) (2) only
C) Either (1) or (2)
D) Both (1) and (2)

Question

Direct labor is sometimes the appropriate basis for assigning overhead cost to products. It is appropriate to use direct labor when which of the following is true?
(1)	Direct labor constitutes a significant part of total product cost.
(2)	A high correlation exists between direct labor and changes in the amount of overhead costs.
A)	(1) only
B)	(2) only
C)	Either (1) or (2)
D)	Both (1) and (2)

Quizplus · Accepted Answer

Direct labor is an appropriate basis for assigning overhead costs to products when both (1) direct labor constitutes a significant part of total product cost and (2) a high correlation exists between direct labor and changes in the amount of overhead costs. Therefore, both (1) and (2) must be true for the use of direct labor to be appropriate.

Direct Labor Is Sometimes the Appropriate Basis for Assigning Overhead