The cost-allocation base used for the fixed overhead rate should be ________.
A) underestimated due to the conservatism principle
B) overestimated due to the conservatism principle
C) the most plausible and reliable measure available of the cause and effect relationship between overhead costs and production volume
D) the most plausible and reliable measure available of the relationship between overhead costs and sales

Question

Quizplus · Accepted Answer

The cost-allocation base used for the fixed overhead rate should be the most plausible and reliable measure available of the cause and effect relationship between overhead costs and production volume. This ensures that overhead costs are allocated to products in a way that reflects their actual usage of the overhead resources. Underestimating or overestimating the allocation base could lead to distorted cost allocations and misinformed decision-making. Using sales as the allocation base is not appropriate for fixed overhead costs, as these costs are not directly related to sales revenue.

The Cost-Allocation Base Used for the Fixed Overhead Rate Should