Direct labor is an appropriate allocation base for overhead when overhead costs and direct labor are not highly correlated.

Question

Quizplus · Accepted Answer

Direct labor is a commonly used allocation base for overhead because the assumption is that overhead costs are related to the amount of labor required to produce a product or service. If overhead costs and direct labor costs are not highly correlated, then using direct labor as an allocation base may result in inaccurate or distorted cost information. In this case, an alternative allocation base should be used to allocate overhead costs more accurately.

Direct Labor Is an Appropriate Allocation Base for Overhead When