Traditional cost systems usually allocate overhead to products on the basis of direct labor.

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Traditional cost systems usually allocate overhead to products on the basis of direct labor. This is because direct labor was seen as a major driver of overhead costs in the past. However, this approach has been criticized for not taking into account other factors that may also drive overhead costs, such as machine time or complexity of the production process, and for not accurately reflecting the true cost of producing each product. As a result, many companies have switched to alternative methods such as activity-based costing (ABC) to allocate overhead costs more accurately.

Traditional Cost Systems Usually Allocate Overhead to Products on the Basis